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| FISV > SEC Filings for FISV > Form 10-K on 27-Feb-2009 | All Recent SEC Filings |
27-Feb-2009
Annual Report
Overview
Management's discussion and analysis of financial condition and results of operations is provided as a supplement to our 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:
• Recent developments. This section provides a general description of recent events that are important to understanding our results of operations and financial condition.
• Critical accounting policies. This section contains a discussion of the accounting policies that we believe are important to our financial condition and results of operations and that require significant judgment and estimates on the part of management in their application. In addition, all of our significant accounting policies, including critical accounting policies, are summarized in Note 1 to the accompanying consolidated financial statements.
• Recent accounting pronouncements. This section provides a discussion of recent accounting pronouncements that we believe are important to understanding our results of operations and financial condition.
• Non-GAAP financial measure. This section provides a discussion of internal revenue growth, a non-GAAP financial measure that we use in this report.
• Results of operations. This section contains an analysis of our results of operations by comparing the results for the year ended December 31, 2008 to the results for the year ended December 31, 2007, and comparing the results for the year ended December 31, 2007 to the results for the year ended December 31, 2006.
Recent Developments
On July 14, 2008, we completed the sale of a 51% interest in substantially all of the businesses in our Insurance Services segment ("Fiserv Insurance") to Trident IV, LP. We recognized an after-tax loss of $0.34 per share from the sale. This loss on sale was comprised of a pre-tax loss of $21 million and an income tax provision of $34 million ($0.21 per share) which was incurred on sale due to a significantly lower tax basis in the stock compared to the book basis of the net assets sold. Upon closing, we received cash proceeds of approximately $500 million and a $30 million note due in 2018. Our remaining 49% ownership interest in Fiserv Insurance is accounted for using the equity method of accounting whereby our investment was established based on our historical basis, is adjusted for our share of undistributed net income or net loss, and is reported within other long-term assets in our consolidated balance sheet. Beginning on July 15, 2008, we no longer consolidate revenues and expenses of Fiserv Insurance and report our 49% share of net income as a separate line item on our consolidated statement of income.
On February 4, 2008, we completed the first of two transactions to dispose of our Investment Support Services segment ("Fiserv ISS") by selling Fiserv Trust Company and the accounts of our institutional retirement plan and advisor services operations to TD AMERITRADE Online Holdings, Inc. for approximately $200 million, net of income taxes and transaction costs. In the second transaction, Robert Beriault Holdings, Inc. has agreed to acquire the remaining accounts and net capital of Fiserv ISS, including the investment administration services business which provides back office and custody services for individual retirement accounts. This portion of the Fiserv ISS disposition remains subject to customary closing conditions and regulatory approval by the FDIC.
On January 10, 2008, we completed the sale of a majority of our health businesses ("Fiserv Health") to UnitedHealthcare Services, Inc. for approximately $480 million, net of income taxes and transaction costs. The financial results of Fiserv Health and Fiserv ISS are reported as discontinued operations for all periods presented.
Critical Accounting Policies
General
Our consolidated financial statements and accompanying notes have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these consolidated financial statements requires our management to make estimates, judgments and assumptions that affect the reported amount of assets, liabilities, revenues and expenses. We continually evaluate the accounting policies and estimates that we use to prepare our consolidated financial statements. We base our estimates on historical experience and assumptions that we believe are reasonable in light of current circumstances. Actual amounts and results could differ materially from these estimates.
Valuation of Goodwill and Acquired Intangible Assets
We are required to allocate the purchase price of acquired businesses to the assets acquired and liabilities assumed in the transaction at their estimated fair values. The estimates used to determine the fair value of long-lived assets, such as intangible assets, can be complex and require a significant amount of judgment. We use the information available to us to make fair value determinations and engage independent valuation specialists, when necessary, to assist in the fair value determination of significant acquired long-lived assets. We are also required to estimate the useful lives of intangible assets to determine the amount of acquisition-related intangible asset amortization expense to record in future periods. We periodically review the estimated useful lives assigned to our definite-lived intangible assets to determine whether such estimated useful lives continue to be appropriate.
Determining the fair value of a reporting unit or acquired intangible assets with indefinite lives involves judgment and the use of significant estimates and assumptions, which include assumptions regarding the revenue growth rates and operating margins used to calculate estimated future cash flows, risk-adjusted discount rates and future economic and market conditions. Our most recent impairment assessment in the fourth quarter of 2008 determined that the carrying values of goodwill and indefinite-lived intangible assets are not impaired. Given the significance of our goodwill and intangible asset balances, an adverse change in fair value could result in an impairment charge, which could be material to our financial statements.
Revenue Recognition
The majority of our revenues are generated from monthly account and transaction-based fees. Revenue is recognized when the related services have been rendered. Revenues are primarily recognized under service agreements that are long-term in nature, generally three to five years, and that do not require management to make significant judgments or assumptions. Given the nature of our business and the rules governing revenue recognition, our revenue recognition practices do not involve significant estimates that materially affect our results of operations. Additional information about our revenue recognition policies is included in Note 1 to the consolidated financial statements.
Other
We do not participate in, nor have we created, any off-balance sheet variable interest entities or other off-balance sheet financing, other than operating leases. We use derivative financial instruments for managing our exposure to changes in interest rates, managing our ratio of fixed to floating-rate long-term debt and foreign exchange rate risks. We do not enter into any derivative financial instruments for speculative purposes.
Recent Accounting Pronouncements
See Note 1 to our consolidated financial statements for a description of recent accounting pronouncements, including the anticipated adoption dates, which is incorporated herein by reference.
Non-GAAP Financial Measure
In this report, we refer to internal revenue growth percentage, which is a non-GAAP financial measure. We use internal revenue growth percentage to monitor and evaluate our performance, and it is presented in this report because we believe that it allows shareholders to understand the portion of our revenue growth that is attributed to acquired companies as compared to internal revenue growth. This non-GAAP financial measure should not be considered to be a substitute for our reported results prepared in accordance with GAAP. The method that we use to calculate internal revenue growth percentage is not necessarily comparable to similarly titled measures presented by other companies.
Years Ended December 31,
(In millions) 2008 2007 2007 2006
Financial Segment
Total revenues $ 2,144 $ 2,050 $ 2,050 $ 1,987
Acquired revenue from acquisitions - 132 - 16
Total $ 2,144 $ 2,182 $ 2,050 $ 2,003
Internal revenue growth (decline) $ (38 ) $ 47
Internal revenue growth percentage (2 )% 2 %
Payments Segment
Total revenues $ 2,131 $ 1,070 $ 1,070 $ 863
Acquired revenue from acquisitions - 941 - 120
Total $ 2,131 $ 2,011 $ 1,070 $ 983
Internal revenue growth $ 120 $ 87
Internal revenue growth percentage 6 % 9 %
Results of Operations
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Business Segments
We acquired CheckFree Corporation ("CheckFree") on December 3, 2007. In connection with the integration of CheckFree and the significant expansion of our payments related businesses, along with associated organizational changes, we reclassified our reporting segments for all periods presented to align them with how our chief operating decision maker currently manages the business. As a result, effective January 1, 2008, our operations consist of the following business segments: Financial Institution Services ("Financial"), Payments and Industry Products ("Payments"), Insurance Services ("Insurance") and Corporate and Other. 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 Payments segment provides products and services that address a range of technology needs for the financial services industry, including: Internet banking, electronic bill payment, electronic funds transfer and debit processing, fraud and risk management capabilities, card and print personalization services, check imaging, and investment account processing services for separately managed accounts. In 2008, we completed the sale of a 51% interest in substantially all of the businesses in the Insurance segment. The Corporate and Other segment primarily consists of unallocated corporate overhead expenses, amortization of acquisition-related intangible assets and intercompany eliminations.
Components of Revenues and Expenses
The following summary describes the components of revenues and expenses as presented in our consolidated statements of income. A description of our revenue recognition policies is included in Note 1 to the consolidated financial statements.
Processing and Services
Processing and services revenues, which in 2008 represented 76% of our consolidated revenues, are primarily generated from account and transaction-based fees under contracts that generally have terms of three to five years. Revenue is recognized when the related transactions are processed and services have been rendered. Processing and services revenues are most reflective of our business performance because a significant amount of our total operating profit is generated by these services. Cost of processing and services includes costs directly
Product
Product revenues, which in 2008 represented 24% of our consolidated revenues, are primarily derived from integrated print and card production, prescription product and software licenses. Prior to our sale of a 51% interest in Fiserv Insurance on July 14, 2008, prescription product revenues were recognized on a gross basis to include the prescription price. Cost of product includes costs directly associated with the products sold and includes the following: costs of materials and prescription products; personnel; infrastructure costs; depreciation and amortization; and other costs directly associated with product revenue.
Selling, General and Administrative Expenses
Selling, general and administrative expenses primarily consist of: salaries, wages and related expenses paid to sales personnel, administrative employees and management; advertising and promotional costs; depreciation and amortization; and other selling and administrative expenses.
Results of Operations
The following table presents certain amounts included in our consolidated statements of income, the relative percentage that those amounts represent to revenues and the change in those amounts from year to year. This information should be read together with the consolidated financial statements and accompanying notes.
Years Ended December 31,
(In millions) Percentage of Revenue(1) Increase (Decrease)
2008 2007 2006 2008 2007 2006 2008 vs. 2007 2007 vs. 2006
Revenues:
Processing and services $ 3,616 $ 2,668 $ 2,466 76.3 % 68.5 % 69.6 % $ 948 36 % $ 202 8 %
Product 1,123 1,229 1,078 23.7 % 31.5 % 30.4 % (106 ) (9 )% 151 14 %
Total revenues 4,739 3,897 3,544 100 % 100 % 100 % 842 22 % 353 10 %
Expenses:
Cost of processing and
services 2,099 1,639 1,573 58.0 % 61.4 % 63.8 % 460 28 % 66 4 %
Cost of product 917 979 839 81.7 % 79.7 % 77.8 % (62 ) (6 )% 140 17 %
Sub-total 3,016 2,618 2,412 63.6 % 67.2 % 68.1 % 398 15 % 206 9 %
Selling, general and
administrative 833 540 465 17.6 % 13.9 % 13.1 % 293 54 % 75 16 %
Total expenses 3,849 3,158 2,877 81.2 % 81.0 % 81.2 % 691 22 % 281 10 %
Operating income 890 739 667 18.8 % 19.0 % 18.8 % 151 20 % 72 11 %
Interest expense (260 ) (76 ) (41 ) (5.5 )% (2.0 )% (1.2 )% 184 242 % 35 85 %
Interest income 13 7 - 0.3 % 0.2 % - 6 86 % 7 -
Loss on sale of businesses (24 ) - - (0.5 )% - - 24 - - -
Income from continuing
operations before income
taxes and income from
investment in
unconsolidated affiliate $ 619 $ 670 $ 626 13.1 % 17.2 % 17.7 % $ (51 ) (8 )% $ 44 7 %
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(1) Each percentage of revenue is calculated as the relevant revenue, expense, income or loss amount divided by total revenues, except for cost of processing and services and cost of product amounts which are divided by the related component of revenues.
Total Revenues Years Ended December 31, Corporate (In millions) Financial Payments Insurance and Other Total Total revenues: 2008 $ 2,144 $ 2,131 $ 513 $ (49 ) $ 4,739 2007 2,050 1,070 804 (27 ) 3,897 2006 1,987 863 706 (12 ) 3,544 2008 Revenue growth (decline) $ 94 $ 1,061 $ (291 ) $ (22 ) $ 842 2008 Revenue growth (decline) percentage 5 % 99 % (36 )% 22 % 2007 Revenue growth (decline) $ 63 $ 207 $ 98 $ (15 ) $ 353 2007 Revenue growth (decline) percentage 3 % 24 % 14 % 10 % |
Total revenues increased $842 million, or 22%, in 2008 compared to 2007, and $353 million, or 10%, in 2007 compared to 2006. The increase in total revenues during 2008 compared to 2007 was primarily the result of increased processing and services revenues from our acquisition of CheckFree in December 2007, partially offset by decreased revenues in our Insurance segment as a result of our sale of a 51% interest in Fiserv Insurance in July 2008. As a result of this transaction, the revenues of Fiserv Insurance are no longer included in our consolidated revenues beginning July 15, 2008, but are included for all historical periods. The increase in total revenues during 2007 compared to 2006 was primarily due to increased prescription product revenues in our Insurance segment and increased processing and services revenues from our acquisition of CheckFree.
Revenues in our Financial segment increased $94 million, or 5%, in 2008 and $63 million, or 3%, in 2007 compared to the prior year periods. The revenue increase in 2008 compared to 2007 was primarily due to incremental processing and services revenues from our acquisition of CheckFree. The revenue increase in 2007 compared to 2006 was primarily driven by new client growth and increased sales to existing clients in our banking and credit union account processing businesses. Internal revenue declined 2% in our Financial segment during 2008 and increased 2% in 2007. Internal revenues were negatively impacted by three percentage points and one percentage point in 2008 and 2007, respectively, due to the significant downturn in the U.S. mortgage markets which resulted in a decline in home-equity processing revenues of $70 million and $23 million in 2008 and 2007, respectively. In addition, the internal revenue growth rate in our Financial segment during 2008 was negatively impacted by slower discretionary spending by our financial institution clients resulting in reduced higher-margin revenue, such as license fees and associated professional services.
Revenues in our Payments segment increased $1.06 billion, or 99%, in 2008 and $207 million, or 24%, in 2007 compared to the prior year periods. These increases were primarily due to incremental processing and services revenue from our acquisition of CheckFree. The internal revenue growth percentages in our Payments segment of 6% and 9% in 2008 and 2007, respectively, were primarily driven by new clients and increased transaction volumes from existing clients in our electronic payments businesses, including our expedited bill payment and electronic funds transfer processing businesses, along with solid growth in our output solutions businesses.
Revenues in our Insurance segment decreased $291 million, or 36%, in 2008 and increased $98 million, or 14%, in 2007 compared to the prior year periods. Revenues declined in 2008 compared to 2007 primarily due to our sale of a 51% interest in Fiserv Insurance in July 2008. The revenue increase in 2007 compared to 2006 was primarily due to our acquisition of a workers' compensation transaction processing business in the third quarter of 2007, partially offset by a $33 million decrease in higher-margin flood claims processing revenues.
Total expenses increased $691 million, or 22%, in 2008 and $281 million, or 10%, in 2007 compared to the prior year periods. The increase in total expenses in 2008 compared to 2007 was primarily due to our acquisition of CheckFree, partially offset by a decrease in expenses in our Insurance segment caused by our sale of a 51% interest in Fiserv Insurance in 2008.
Cost of processing and services as a percentage of processing and services revenue decreased to 58.0% in 2008 from 61.4% in 2007 and 63.8% in 2006. These decreases were primarily due to higher-margin processing revenues associated with our acquisition of CheckFree and overall improvements in operating efficiencies as a result of improved business mix and the implementation of strategic initiatives that lowered our overall cost structure.
Cost of product as a percentage of product revenue increased to 81.7% in 2008 from 79.7% in 2007 and 77.8% in 2006. The increase in 2008 compared to 2007 was primarily due to a $94 million increase in prescription product costs during the first half of 2008 prior to our sale of a 51% interest in Fiserv Insurance, which generated historical operating margins in the mid-single digits due primarily to the inclusion of prescription product costs in both product revenues and cost of product. In addition, cost of product as a percentage of product revenue in 2008 was negatively impacted by a $45 million increase in postage pass-through revenue and expenses in our output solutions businesses. The increase in 2007 compared to 2006 was primarily driven by an $82 million increase in prescription product costs.
Selling, general and administrative expenses increased $293 million and $75 million in 2008 and 2007, respectively, compared to the prior year periods and increased as a percentage of revenues to 17.6% in 2008 from 13.9% in 2007 and 13.1% in 2006. The increases in 2008 compared to 2007 were primarily due to our acquisition of CheckFree, partially offset by a decrease in expenses in our Insurance segment resulting from our sale of a 51% interest in that business. As a result of our acquisition of CheckFree, amortization expense for acquired intangible assets included in selling, general and administrative expenses increased by $79 million in 2008 compared to 2007, and incremental merger costs, including integration project management, retention bonuses and other expenses, were $37 million and $8 million in 2008 and 2007, respectively.
Operating Income and Operating Margin Years Ended December 31, Corporate (In millions) Financial Payments Insurance and Other Total Operating income: 2008 $ 535 $ 579 $ 44 $ (268 ) $ 890 2007 515 253 78 (107 ) 739 2006 421 202 110 (66 ) 667 Operating income growth (decline): 2008 $ 20 $ 326 $ (34 ) $ (161 ) $ 151 2008 percentage 4 % 129 % (44 )% 20 % 2007 $ 94 $ 51 $ (32 ) $ (41 ) $ 72 2007 percentage 22 % 25 % (29 )% 11 % Operating margin: 2008 24.9 % 27.2 % 8.7 % 18.8 % 2007 25.1 % 23.6 % 9.7 % 19.0 % 2006 21.2 % 23.4 % 15.6 % 18.8 % Operating margin growth (decline):(1) 2008 (0.2 )% 3.6 % (1.0 )% (0.2 )% 2007 3.9 % 0.2 % (5.9 )% 0.2 % |
(1) Represents the percentage point improvement or decline in operating margin.
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