Fidelity National Information Services - 10-Q quarterly report FY

 

(Exact name of registrant as specified in its charter)

     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 þ NO o

     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 (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YES þ NO o

     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 the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) YES o NO þ

     As of July 31, 2009, 191,832,618 shares of the Registrant’s Common Stock were outstanding.

FORM 10-Q
QUARTERLY REPORT
Quarter Ended June 30, 2009

INDEX

See accompanying notes to unaudited consolidated financial statements.

See accompanying notes to unaudited consolidated financial statements.

See accompanying notes to unaudited consolidated financial statements.

See accompanying notes to unaudited consolidated financial statements.

     The unaudited financial information included in this report includes the accounts of FIS and its subsidiaries prepared in accordance with U.S. generally accepted accounting principles and the instructions to Form 10-Q and Article 10 of Regulation S-X. All adjustments considered necessary for a fair presentation have been included. This report should be read in conjunction with the Company’s Annual Report on Form 10-K, as amended by the Annual Report on Form 10-K/A, for the year ended December 31, 2008. The preparation of these Consolidated Financial Statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the Consolidated Financial Statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates. Certain reclassifications have been made in the 2008 Consolidated Financial Statements to conform to the classifications used in 2009.

     We report the results of our operations in four reporting segments: 1) Financial Solutions, 2) Payment Solutions, 3) International and 4) Corporate and Other (Note 8).

     During 2008, we discontinued certain operations which are reported as discontinued operations in the Consolidated Statements of Earnings for the three-month and six-month periods ended June 30, 2009 and 2008, in accordance with the authoritative guidance for the impairment or disposal of long-lived assets. Interest is allocated to discontinued operations based on debt to be retired and debt specifically identified as related to the respective discontinued operation.

     LPS

     On July 2, 2008 (the “spin-off date”), all of the shares of the common stock, par value $0.0001 per share, of Lender Processing Services, Inc. (“LPS”) were distributed to FIS shareholders through a stock dividend (the “spin-off”). At the time of the distribution, LPS consisted of substantially all the assets, liabilities, businesses and employees related to FIS’ Lender Processing Services segment. Upon the distribution, FIS shareholders received one-half share of LPS common stock for every share of FIS common stock held as of the close of business on June 24, 2008. The results of operations of the former LPS segment of FIS are reflected as discontinued operations in the Consolidated Statements of Earnings for the three-month and six-month periods ended June 30, 2008. LPS had revenues of $460.4 million and $913.1 during the three-month and six-month periods ended June 30, 2008, respectively. LPS had earnings before taxes of $93.0 million and $186.6 during the three-month and six-month periods ended June 30, 2008, respectively.

     Certegy Australia, Ltd

     On October 13, 2008, we sold Certegy Australia, Ltd. (“Certegy Australia”) for $21.1 million in cash and other consideration, because its operations did not align with our strategic plans. Certegy Australia had revenues of $9.0 million and $16.9 million during the three-month and six-month periods ended June 30, 2008, respectively. Certegy Australia had (losses) earnings before taxes of ($0.5) million and $5.4 million during the three-month periods ended June 30, 2009 and 2008 and ($2.4) million and $9.6 million during the six-month periods ended June 30, 2009 and 2008, respectively.

     Certegy Gaming Services, Inc.

     On April 1, 2008, we sold Certegy Gaming Services, Inc. (“Certegy Game”) for $25.0 million, realizing a pretax loss of $4.1 million, because its operations did not align with our strategic plans. Certegy Game had revenues of $27.2 million and earnings before taxes of $0.3 million (excluding the pretax loss realized on sale) during the six-month period ended June 30, 2008.

     FIS Credit Services, Inc.

     On February 29, 2008, we sold FIS Credit Services, Inc. (“Credit”) for $6.0 million, realizing a pre-tax gain of $1.4 million, because its operations did not align with our strategic plans. Credit had revenues of $1.4 million and losses before taxes of $0.2 million (excluding the realized gain) during the six-month period ended June 30, 2008.

     Homebuilders Financial Network, LLC

     During the year ended December 31, 2008, we discontinued and dissolved Homebuilders Financial Network, LLC and its related entities (“HFN”) due to the loss of a major customer. HFN had revenues of $0.2 million and $1.4 million during the three-month and six-month periods ended June 30, 2008, respectively. HFN had earnings (losses) before taxes of $0.7 million and ($4.7) million during the three-month and six-month periods ended June 30, 2008.

     We are party to certain related party agreements described below.

     A detail of related party items included in revenues for the three-month and six-month periods ended June 30, 2009 and 2008 is as follows (in millions):

     A detail of related party items included in operating expenses (net of expense reimbursements) for the three-month and six-month periods ended June 30, 2009 and 2008 is as follows (in millions):

     In March 2006, we entered into an agreement with ABN AMRO Real (“ABN”) and Banco Bradesco S.A. (“Bradesco”) (collectively, “banks”) to form a venture to provide comprehensive, fully outsourced card processing services to Brazilian card issuers. In exchange for a 51% controlling interest in the venture, we contributed our existing Brazilian card processing business contracts and Brazilian card processing infrastructure and committed to make enhancements to our card processing system to meet the processing needs of the banks and their affiliates. The banks executed long-term contracts to process their card portfolios with the venture in exchange for an aggregate 49% interest in the venture. Additionally, we provide item processing services to Bradesco and ABN outside of the Brazilian card processing venture.

     Sedgwick

     We provide data processing services to Sedgwick CMS, Inc. (“Sedgwick”), a company in which Fidelity National Financial, Inc., (“FNF”) holds an approximate 32% equity interest.

     FNF

     We provide data processing services to FNF consisting primarily of infrastructure support and data center management. Our agreement with FNF runs through June 30, 2013, with an option to renew for one or two additional years, subject to certain early termination provisions (including the payment of minimum monthly service and termination fees). We also have a $5.9 million note receivable from FNF, of which $0.8 million is included in receivable from FNF and LPS in the Consolidated Balance Sheets, which matures in September 2012, with interest payable at a rate of LIBOR plus 0.45% (1.64% as of June 30, 2009). We recorded interest income related to this note of less than $0.1 million and $0.1 million for the three-month periods ended June 30, 2009 and 2008 and $0.1 million and $0.2 million for the six-month periods ended June 30, 2009 and 2008, respectively. Historically, FNF has provided to us, and to a lesser extent we have provided to FNF, certain administrative support services relating to general management and

administration. The pricing for these services, both to and from FNF, is at cost. We also incurred expenses for amounts paid by us to FNF under leases of certain personal property and technology equipment.

     We provide transitional services to LPS as a result of the spin-off. In addition, we have entered into certain property management and real estate lease agreements with LPS relating to our Jacksonville corporate headquarters.

     We believe the amounts earned from or charged by us under each of the foregoing arrangements are fair and reasonable. We believe our service arrangements are priced within the range of prices we offer to third parties. However, the amounts we earned or that were charged under these arrangements were not negotiated at arm’s-length, and may not represent the terms that we might have obtained from an unrelated third party.

     The basic weighted average shares and common stock equivalents for the three-month and six-month periods ended June 30, 2009 and 2008 are computed using the treasury stock method.

     The following table summarizes the earnings per share attributable to FIS common stockholders, for the three-month and six-month periods ended June 30, 2009 and 2008 (in millions, except per share amounts):

     Options to purchase approximately 11.3 million shares and 9.4 million shares of our common stock for the three-month periods and 15.1 million shares and 9.0 million shares of our common stock for the six-month periods ended June 30, 2009 and 2008, respectively, were not included in the computation of diluted earnings per share because they were antidilutive.

     On March 31, 2009, FIS and Metavante Technologies, Inc. (“Metavante”) entered into an Agreement and Plan of Merger (the “Merger Agreement”), pursuant to which FIS will acquire Metavante. The transaction will be structured as a tax-free reorganization whereby Metavante will be merged with and into a newly formed subsidiary of FIS (the “Merger”).

     Under the terms of the Merger Agreement, Metavante shareholders will receive a fixed exchange ratio of 1.35 (the “Exchange Ratio”) shares of FIS common stock for each share of Metavante common stock they own. In addition, outstanding Metavante stock options and other stock-based awards (other than performance shares) will be converted into stock options and other stock-based awards, respectively, with respect to shares of FIS common stock using the Exchange Ratio.

          In connection with the Merger Agreement, FIS entered into an Investment Agreement (the “Investment Agreement”) on March 31, 2009, with certain affiliates of Thomas H. Lee Partners, L.P. (“THL”) and FNF, pursuant to which, the Company will issue and sell (a) to THL in a private placement 12.9 million shares of common stock of the Company for an aggregate purchase price of

approximately $200.0 million and (b) to FNF in a private placement 3.2 million shares of common stock of the Company for an aggregate purchase price of approximately $50.0 million. Pursuant to the terms of the Investment Agreement, the Company will pay each of THL and FNF a transaction fee equal to 3% of their respective investments.

     On July 21, 2009, the Registration Statement filed by FIS with the Securities and Exchange Commission was declared effective and FIS and Metavante have mailed the joint proxy statement/prospectus relating to the shareholders meetings to their respective shareholders. On September 4, 2009 FIS and Metavante will hold special meetings of their respective shareholders to vote on the issuance of FIS common stock in connection with the Merger and the Investment Agreement. FIS and Metavante shareholders of record as of June 29, 2009 will be entitled to vote at the special meeting.

     Completion of the merger remains subject to antitrust clearance in the United States, receipt of FIS and Metavante shareholder approvals, and other customary closing conditions. FIS and Metavante expect the merger to close during the fourth quarter of 2009.

     Long-term debt as of June 30, 2009 and December 31, 2008 consisted of the following (in millions):

     The fair value of the Company’s long-term debt at June 30, 2009 is estimated to be approximately $321.0 million lower than the carrying value (based on values of trades of our debt made in close proximity to quarter-end). These estimates are subjective in nature and involve uncertainties and significant judgment in the interpretation of current market data. Therefore, the values presented are not necessarily indicative of amounts the Company could realize or settle currently.

     As of June 30, 2009, we have entered into the following interest rate swap transactions converting a portion of the interest rate exposure on our Term and Revolving Loans from variable to fixed (in millions):

     We have designated these interest rate swaps as cash flow hedges. A portion of the amount included in accumulated other comprehensive earnings is reclassified into interest expense as a yield adjustment as interest payments are made on the Term and Revolving Loans. In accordance with the authoritative guidance for fair value measurements, the inputs used to determine the estimated fair value of our interest rate swaps are Level 2-type measurements. We considered our own credit risk when determining the fair value of our interest rate swaps. During June 2008, we terminated the $750 million interest rate swap tied to the Term Loan B that was retired during July 2008, without any significant impact to our financial position or results of operations during the period as its fair value was approximately zero on the date of termination.

     A summary of the fair value of the Company’s derivative instruments is as follows (in millions):

     A summary of the effect of derivative instruments on the Company’s Consolidated Statements of Earnings recognized in Other Comprehensive Earnings (“OCE”) are as follows (in millions):

     Our existing cash flow hedges are highly effective and there is no current impact on earnings due to hedge ineffectiveness. It is our practice to execute such instruments with credit-worthy banks at the time of execution and not to enter into derivative financial instruments for speculative purposes. As of June 30, 2009, we believe that our interest rate swap counterparties will be able to fulfill their obligations under our agreements and we believe we will have debt outstanding through the various expiration dates of the swaps such that the future hedge cash flows remain probable of occurring.

     Principal maturities of long-term debt at June 30, 2009 are as follows (in millions):

     Through the eFunds Corporation (“eFunds”) acquisition on September 12, 2007, we assumed $100.0 million in long-term notes payable previously issued by eFunds (the “eFunds Notes”). On February 26, 2008, we redeemed the eFunds Notes for a total of $109.3 million, which included a make-whole premium of $9.3 million.

     In the ordinary course of business, the Company is involved in various pending and threatened litigation matters related to operations, some of which include claims for punitive or exemplary damages. The Company believes that no actions, other than the matters listed below, depart from customary litigation incidental to its business. As background to the disclosure below, please note the following:

     On April 7, 2009, a putative class action complaint was filed by a purported Metavante shareholder against Metavante, its directors, certain officers, and FIS. The complaint alleges that the Metavante directors and officers breached fiduciary duties to Metavante

shareholders and that Metavante and FIS aided and abetted such breaches. The complaint seeks to enjoin the proposed Merger transaction, preliminarily and permanently, and also seeks unspecified money damages, attorneys’ fees, and class certification. An amended complaint was filed on April 23, 2009, adding an additional plaintiff, but it is otherwise the same as the original complaint. The case is Lisa Repinski, et al v. Michael Hayford, et al , Milwaukee County Circuit Court Case No. 09CV5325.

     On April 24, 2009, a second putative class action containing similar allegations was filed by another purported Metavante shareholder against Metavante and its directors and certain officers. This complaint also seeks to enjoin the Merger transaction, preliminarily and permanently, and also seeks unspecified money damages, attorneys’ fees, and class certification. The case is Samuel Beren v. Metavante Technologies, Inc. et al., Milwaukee County Circuit Court Case No. 09CV6315.

     On April 28, 2009, a motion was filed to consolidate the Repinski and Beren actions; that motion has not yet been decided. FIS believes these actions are without merit and intends to defend vigorously against the claims.

          This is a putative class action filed during the first quarter of 2006 in the U.S. District Court for the Northern District of Texas against Certegy Check Services, Inc. and Certegy Payment Recovery Services, Inc. The complaint seeks damages and declaratory relief for breach of contract as well as alleged violations of the Fair Debt Collection Practices Act (“FDCPA”), Texas Debt Collections Act, and Texas Deceptive Trade Practices Act (“TDTPA”). The Plaintiff wrote a check to a retailer that was dishonored on presentment. The dishonored check was assigned to Certegy for recovery and collection of associated service charges. The Plaintiff contends that there was no authority to collect a $30 service charge on her bounced check, that the collection letters she received were misleading and that Certegy’s actions were oppressive. Point-of-sale signage indicated that a fee of $25 or the maximum allowed by law would be owed for any bounced check. In addition, the check was stamped at the point-of-sale with a similar statement that the plaintiff signed. The service charge statute in Texas allows a reasonable fee of up to $30 for bounced checks. The court dismissed multiple claims arising out of the FDCPA, including all claims based on alleged misrepresentations or oppressive conduct. The only FDCPA claim remaining is Plaintiff’s claim against Certegy Payment Recovery Services under Section 808. Certegy filed a motion to dismiss the state law claims and a motion for summary judgment as to all counts, arguing that Plaintiff expressly agreed to pay a service charge if her check bounced. The court dismissed the declaratory judgment claim and found that Certegy did not make false, deceptive or misleading representations under the TDTPA; however, the court declined to dismiss the remainder of the state law claims. The Plaintiff filed a motion for class certification, and in the first quarter of 2009 the court granted that motion with respect to the FDCPA claim against Certegy Payment Recovery Services, but denied it with respect to all other claims and against all other defendants. Certegy Payment Recovery Services has appealed the decision to the 5th Circuit Court of Appeals. The matter was mediated during the second quarter of 2009 and settled. The settlement is subject to court approval.

          A putative class action lawsuit styled Richard Fresco, et al. v. Automotive Directions, Inc. et al., was filed against eFunds and seven other non-related parties in the U.S. District Court for the Southern District of Florida during the second quarter of 2003. The complaint alleged that eFunds purchased motor vehicle records that were used for marketing and other purposes that are not permitted under the Federal Driver’s Privacy Protection Act (“DPPA”). The plaintiffs sought statutory damages, plus costs, attorney’s fees and injunctive relief. eFunds and five of the other seven defendants settled the case with the plaintiffs. That settlement was approved by the court over the objection of a group of Texas drivers and motor vehicle record holders. The plaintiffs have since moved to amend the court’s order approving the settlement in order to seek a greater attorneys’ fee award and to recover supplemental costs. In the meantime, the objectors filed two class action complaints styled Sharon Taylor, et al. v. Biometric Access Company et al. and Sharon Taylor, et al. v. Acxiom et al. in the U.S. District Court for the Eastern District of Texas during the first quarter of 2007 alleging similar violations of the DPPA. The Acxiom action was filed against the Company’s ChexSystems, Inc. subsidiary, while the Biometric suit was filed against the Company’s Certegy Check Services, Inc. subsidiary. The judge recused himself in the action against Certegy because he was a potential member of the class. The lawsuit was then assigned to a new judge and Certegy filed a motion to dismiss. The court granted Certegy’s motion to dismiss with prejudice in the third quarter of 2008. ChexSystems filed a motion to dismiss or stay its action based upon the earlier settlement and the Court granted the motion to stay pending resolution of the Florida case. The court dismissed the ChexSystems’ lawsuit with prejudice against the remaining defendants in the third quarter of 2008. The plaintiffs moved the court to amend the dismissal to exclude defendants that were parties to the Florida settlement. That motion was granted. The plaintiffs then appealed the dismissal. The plaintiffs’ appeals of the dismissals in both lawsuits are pending.

     This is a nationwide putative class action that was originally filed against eFunds Corporation and its affiliate Deposit Payment Protection Services, Inc. in the U.S. District Court for the Northern District of Illinois during the first quarter of 2008. The complaint alleges willful violation of the Fair Credit Reporting Act (“FCRA”) in connection with the operation of the Shared Check Authorization Network. Plaintiff’s principal allegation is that consumers did not receive appropriate disclosures pursuant to §1681g of the FCRA because the disclosures did not include: (i) all information in the consumer’s file at the time of the request; (ii) the source of the information in the consumer’s file; and/or (iii) the names of any persons who requested information related to the consumer’s check writing history during the prior year. The Company is vigorously defending the matter.

     The Company often indemnifies its customers against damages and costs resulting from claims of patent, copyright, or trademark infringement associated with use of its software through software licensing agreements. Historically, the Company has not made any payments under such indemnifications, but continues to monitor the conditions that are subject to the indemnifications to identify whether it is probable that a loss has occurred, and would recognize any such losses when they are estimable. In addition, the Company warrants to customers that its software operates substantially in accordance with the software specifications. Historically, no costs have been incurred related to software warranties and none are expected in the future, and as such no accruals for warranty costs have been made.

     Summarized financial information for the Company’s segments is shown in the following tables.

     As of and for the three-month period ended June 30, 2009 (in millions):

     As of and for the three-month period ended June 30, 2008 (in millions):

     As of and for the six-month period ended June 30, 2009 (in millions):

     As of and for the six-month period ended June 30, 2008 (in millions):

     Brazil, Germany and the U.K. accounted for the majority of the sales to non-U.S. based customers.

     Total assets at June 30, 2009 and 2008, excludes $93.1 million and $2,038.0 million, respectively, related to discontinued operations. Goodwill at June 30, 2008, exclude $1,112.1 million related to discontinued operations.

     Financial Solutions

     The Financial Solutions segment focuses on serving the processing needs of financial institutions of all sizes, commercial lenders, finance companies and other businesses. The Company’s primary software applications function as the underlying infrastructure of a financial institution’s processing environment. These applications include core bank processing software, which banks use to maintain the primary records of their customer accounts. The Company also provides a number of complementary applications and services that interact directly with the core processing applications, including applications that facilitate interactions between the Company’s financial institution customers and their clients. The Company offers applications and services through a range of delivery and service models, including on-site outsourcing and remote processing arrangements, as well as on a licensed software basis for installation on customer-owned and operated systems.

     Payment Solutions

     The Payment Solutions segment focuses on serving the payment processing and risk management needs of financial institutions, retailers and other businesses. This segment includes card issuer services, which enable banks, credit unions, and others to issue VISA and MasterCard credit and debit cards, private label cards, and other electronic payment cards for use by both consumer and business accounts. In addition, this segment provides risk management services to retailers and financial institutions. The Company offers applications and services through a range of delivery and service models, including on-site outsourcing and remote processing arrangements, as well as on a licensed software basis for installation on customer-owned and operated systems.

     International

     The International segment offers both financial solutions and payment solutions to a wide array of international financial institutions. Also, this segment includes the Company’s consolidated Brazilian card processing venture (see note 3). Included in this segment are long-term assets, excluding Goodwill and other Intangible assets, located outside of the United States totaling $442.7 million and $472.1 million at June 30, 2009 and 2008, respectively. These assets are predominantly located in Germany, Brazil, the U.K. and India.

     Corporate and Other

     The Corporate and Other segment consists of the corporate overhead costs that are not allocated to operating segments. These include costs related to human resources, finance, legal, accounting, domestic sales and marketing and amortization of acquisition-related intangibles and other costs that are not considered when management evaluates segment performance.

     The Company has evaluated transactions, events and circumstances for consideration of recognition or disclosure through August 5, 2009, the date these interim financial statements were issued, and has reflected or disclosed those items within the Consolidated Financial Statements as deemed appropriate.

     The following discussion should be read in conjunction with Item 1: Consolidated Financial Statements and the Notes thereto included elsewhere in this report. The discussion below contains forward-looking statements that involve a number of risks and uncertainties. Statements that are not historical facts, including statements about our beliefs and expectations, are forward-looking statements. Forward-looking statements are based on management’s beliefs, as well as assumptions made by, and information currently available to, management. Because such statements are based on expectations as to future economic performance and are not statements of fact, actual results may differ materially from those projected. The risks and uncertainties which forward-looking statements are subject to include, without limitation: changes in general economic, business and political conditions, including changes in the financial markets; the effect of governmental regulations, including the possibility that there are unexpected delays in obtaining regulatory approvals for our merger with Metavante; the failure to obtain required transaction approvals from FIS’ and Metavante’s shareholders; the effects of our substantial leverage which may limit the funds available to make acquisitions and invest in our business; the risks of reduction in revenue from the elimination of existing and potential customers due to consolidation in the banking, retail and financial services industries or due to financial failures suffered by firms in those industries; failures to adapt our services to changes in technology or in the marketplace; our potential inability to find suitable acquisition candidates or difficulties in integrating acquisitions; significant competition that our operating subsidiaries face; and other risks detailed in the “Statement Regarding Forward-Looking Information,” “Risk Factors” and other sections of the Company’s Form 10-K and other filings with the Securities and Exchange Commission. All forward-looking statements included in this document are based on information available at the time the document was filed. FIS assumes no obligation to update any forward-looking statement.

     Overview

     We are one of the largest global providers of processing services to financial institutions and businesses, serving customers in over 90 countries throughout the world. We are among the market leaders in core processing, card issuing services and check point-of-sale verification and guarantee. We offer a diversified service mix, and benefit from the opportunity to cross-sell multiple services across our broad customer base. We have four reporting segments: Financial Solutions, Payment Solutions, International and Corporate and Other. A description of these segments is included in Note 8 to the Notes to Consolidated Financial Statements (Unaudited). Revenues by segment and the results of operations of our segments are discussed below in Segment Results of Operations.

     Business Trends and Conditions

     A significant portion of our revenue is derived from transaction processing fees. As a result, the number of deposit and card transactions can affect our business and thus the condition of the overall economy can have an effect on our growth. In light of current economic conditions, we are seeking to manage our costs and capital expenditures prudently. We reduced both domestic headcount and capital expenditures in 2009 from 2008 levels.

     Card transactions continue to increase as a percentage of total point-of-sale payments, which fuels continuing demand for card-related services. We continue to launch new services aimed at accommodating this demand. In recent years, we have introduced a variety of stored-value card types, Internet banking, and electronic bill presentment/payment services, as well as a number of card enhancement and loyalty/reward programs. The common goal of these offerings continues to be convenience and security for the consumer coupled with value to the financial institution. At the same time, the use of checks continues to decline as a percentage of total point-of-sale payments. We have announced that we are considering strategic alternatives for our remaining check businesses, although no assurance can be given as to whether or when any disposal transaction or other change with respect to those businesses will be accomplished.

     We compete for both licensing and outsourcing business, and thus are affected by the decisions of financial institutions to utilize our services under an outsourced arrangement or to process in-house under a software license and maintenance agreement. As a provider of outsourcing solutions, we benefit from multi-year recurring revenue streams, which help moderate the effects of year to year economic changes on our results of operations. Generally, demand for outsourcing solutions has increased over time as service providers such as us realize economies of scale and improve their ability to provide services that improve customer efficiencies and reduce costs.

     Consolidation within the banking industry may be beneficial or detrimental to our businesses. When consolidations occur, merger partners often operate disparate systems licensed from competing service providers. The newly formed entity generally makes a determination to migrate its core systems to a single platform. When a financial institution processing client is involved in a consolidation, we may benefit by expanding the use of our services if such services are chosen to survive the consolidation and support the newly combined entity. Conversely, we may lose market share if a customer of ours is involved in a consolidation and our services are not chosen to survive the consolidation and support the newly combined entity. While it is difficult to mitigate the risks of consolidations, we seek to do so through offering competitive services and trying to take advantage of situations on a case by case basis depending on the specific opportunities at the combined company.

     We believe that we are in the midst of one of the most difficult times that has ever existed for financial institutions, retailers and other businesses in the United States and internationally. We expect there to be a significant number of bank failures in the next few years, which may be offset to a degree by somewhat decreased bank acquisition activity. However, we believe that our potential exposure to bank failures and forced government actions that have occurred to date is less than one percent of our revenues. Additionally, this exposure does not consider any incremental revenues we may generate from potential license fees or service associated with assisting surviving institutions with integrating acquired assets resulting from financial failures. In the current economy, we believe customers may turn more to outsourcing as a means to reduce fixed costs and gain a competitive edge. However, although we have lately seen an increase in requests for outsourcing proposals, it is not yet certain how many of these requesting financial institutions will move forward with their potential projects given current economic conditions. Financial institutions may defer upgrades or other outsourcing projects until conditions improve. We believe that software sales and to a lesser degree professional services will be the most at risk as far as purchases that financial institutions may defer, because in general they tend to be more discretionary than outsourcing projects. The software sales and professional services represented approximately 14% of our revenues during the year ended December 31, 2008. We are addressing the foregoing trends and business conditions in part by managing our costs and capital expenditures, as described above, and by ensuring that the pricing and quality of our services continue to deliver value for our existing and potential customers.

     While we believe that we are well positioned to withstand the current financial crisis, there are factors outside our control that might impact our operating results that we may not be able to fully anticipate as to timing and severity, including but not limited to adverse effects if banks are nationalized, continued global economic conditions worsen, causing further slowdowns in consumer spending and lending, and the impact on our ability to access capital should any of our lenders fail.

     Critical Accounting Policies

     There have been no significant changes to our critical accounting policies since our Form 10-K was filed on February 27, 2009, as amended by our Form 10-K/A filed on March 10, 2009.

     Transactions with Related Parties

     See Note 3 to the Notes to Consolidated Financial Statement for a detailed description of transactions with related parties.

     Discontinued Operations

     See Note 2 to the Notes to Consolidated Financial Statements for a detailed description of discontinued operations.

     Factors Affecting Comparability

     On July 2, 2008, we completed the LPS spin-off. The results of operations of the Lender Processing Services segment through the spin-off date are reflected as discontinued operations in the Consolidated Statements of Earnings for all periods presented.

     As a result of the above transaction, the results of operations in the periods covered by the Consolidated Financial Statements may not be directly comparable.

     Processing and Services Revenues

     Processing and services revenues totaled $834.8 million and $869.7 million for the three-month periods and $1,632.6 million and $1,700.0 million for the six-month periods ended June 30, 2009 and 2008, respectively. The decrease in revenue of $34.9 million, or 4.0% during the three-month period and $67.4 million or 4.0% during the six-month period ended June 30, 2009, as compared to the 2008 periods is primarily attributable to the impact of unfavorable foreign currency translations resulting from a strengthening of the U.S. dollar. Excluding the impact of unfavorable foreign currency translations, our International revenue growth was offset by declines in Financial Solutions and Payment Solutions segment revenues during both the three-month and six month periods ended June 30, 2009.

     Cost of Revenues

     Cost of revenues totaled $602.7 million and $674.0 million for the three-month periods and $1,199.9 million and $1,322.7 million for the six-month periods ended June 30, 2009 and 2008, respectively, resulting in gross profit of $232.1 million and $195.7 million for the three-month periods and $432.7 million and $377.3 million for the six-month periods ended June 30, 2009 and 2008, respectively. Gross profit as a percentage of revenues (“gross margin”) was 27.8% and 22.5% in the three-month periods and 26.5% and 22.2% in the six-month periods ended June 30, 2009 and 2008, respectively. The decrease in cost of revenues of $71.3 million in the three-month period and $122.8 million in the six-month period ended June 30, 2009, as compared to the 2008 periods is primarily attributable to foreign currency adjustments resulting from a strengthening of the U.S. dollar and the decrease in revenue across our three operating segments. The increase in gross margin of 5.3% in the three-month period and 4.3% in the six-month period ended June 30, 2009 over 2008 periods was primarily driven by cost reduction activities and improved operating efficiency.

     Selling, General and Administrative Expenses

     Selling, general and administrative expenses totaled $93.2 million and $117.9 million for the three-month periods and $189.3 million and $229.0 million for the six-month periods ended June 30, 2009 and 2008, respectively. The decrease of $24.7 million in the three-month period and $39.7 million in the six-month period ended June 30, 2009, as compared to 2008 is primarily due to higher costs in the prior year related to integration of the 2007 eFunds acquisition and restructuring activities related to the LPS spin-off. Stock-based compensation decreased $2.3 million and $14.8 during the three-month and six-month periods ended June 30, 2009, respectively, as compared to the 2008 periods. The reduction in stock-based compensation for the three month period was mainly attributable to $2.6 million of acceleration charges related to terminations included in the prior year period. The six-month period ended June 30, 2008, also included $14.1 million related to the accelerated vesting of all stock awards held by eFunds employees assumed in the eFunds acquisition. In addition to the acceleration of stock compensation, the three and six month periods ended June 30, 2008 included $8.1 million and $13.8 million, respectively, in other integration and restructuring costs. These amounts are partially offset by merger related costs incurred in the 2009 three-month and six-month periods related to the planned Metavante acquisition. Also included in 2008 were $9.0 million and $18.0 million in the three-month and six-month periods, respectively, for administrative costs associated with LPS that did not qualify for discontinued operations treatment.

     Research and Development Costs

     Research and development costs totaled $21.5 million and $19.9 million for the three-month periods and $44.1 million and $39.2 million for the six-month periods ended June 30, 2009 and 2008, respectively. The increase in research and development costs for the 2009 periods as compared to the 2008 periods results from the determination of which costs are capitalized versus expensed based on the nature and progression of the projects underway in the respective periods.

     Operating Income