FISERV, INC. — Form 10-Q Summary
Business Context and Reporting Period
Fiserv provides electronic transaction processing, electronic bill payment and presentment, business process outsourcing, document distribution, and software and systems solutions. Its principal segments are Payments, Financial Institution Services, and Corporate and Other. This unaudited report covers the three months ended March 31, 2010, compared with the corresponding 2009 period.
Key Financial Metrics
| Metric | Q1 2010 | Q1 2009 | Change |
|---|---|---|---|
| Total revenue | $1,008 million | $1,023 million | Down $15 million, or 1% |
| Processing and services revenue | $831 million | $831 million | Flat |
| Product revenue | $177 million | $192 million | Down $15 million, or 8% |
| Operating income | $238 million | $225 million | Up $13 million, or 6% |
| Operating margin | 23.7% | 22.0% | Up 170 basis points |
| Income from continuing operations | $123 million | $106 million | Up $17 million |
| Net income | $121 million | $103 million | Up $18 million |
| Diluted EPS from continuing operations | $0.80 | $0.68 | Up $0.12 |
| Diluted total EPS | $0.79 | $0.66 | Up $0.13 |
| Operating cash flow from continuing operations | $260 million | $231 million | Up $29 million, or 13% |
| Capital expenditures | $42 million | $45 million | Down $3 million |
Net income included a $2 million loss from discontinued operations in 2010 versus a $3 million loss in 2009. The effective income tax rate was 37.9% in 2010 versus 38.3% in 2009.
Segment Results and Material Changes
- Payments: Revenue was $540 million, down 1%. Operating income was $148 million, down 5%, and operating margin declined to 27.5% from 28.5%. Lower output-solutions product revenue and increased new-product development costs offset growth from new clients and higher electronic-payments transaction volumes.
- Financial: Revenue was $472 million, down 3%. Operating income was $136 million, down 4%, and operating margin declined to 28.8% from 29.3%. Check-processing volumes, specialty consulting, and software-license revenue declined, partly offset by growth and scale efficiencies in bank and credit-union account processing.
- Corporate and Other: The operating loss narrowed to $46 million from $72 million, primarily because the prior-year period included $15 million of employee severance expense and higher CheckFree merger and integration costs.
- Total expenses declined 4% to $770 million. Selling, general and administrative expense decreased 13% to $172 million. Product cost as a percentage of product revenue increased to 76.8% from 74.0% because of lower higher-margin software-license revenue.
- Interest expense declined 17% to $45 million, primarily because of lower borrowings and interest rates. Acquisition-related intangible amortization reduced diluted continuing-operations EPS by approximately $0.15 in 2010 and $0.14 in 2009.
Liquidity, Debt, and Capital Resources
- Cash and cash equivalents were $416 million at March 31, 2010, compared with $363 million at December 31, 2009.
- Long-term debt, including current maturities, was approximately $3.514 billion, down from $3.641 billion at year-end 2009. The company repaid approximately $125 million of long-term debt during the quarter.
- The debt portfolio primarily comprised a $1.75 billion unsecured senior term loan and $1.75 billion of senior notes. The next scheduled term-loan principal payment was $130 million due in December 2010.
- Fiserv maintained a $900 million revolving credit facility, with $30 million of letters of credit outstanding and $870 million of available borrowings at March 31, 2010. The facility expires March 24, 2011.
- The company reported compliance with all financial debt covenants. Interest-rate swaps with $1.2 billion of notional value effectively fixed rates on floating-rate term-loan borrowings at approximately 4.8% before spreads and fees; approximately $40 million of related interest expense was expected to be recognized over the following 12 months.
- Fiserv repurchased approximately 1.4 million shares for $67 million during the quarter and had approximately 5.8 million shares remaining under existing authorizations as of March 31, 2010. The company generally uses operating cash flow for debt repayment, capital expenditures, acquisitions, and share repurchases rather than dividends.
Outlook, Risks, Contingencies, and Unusual Items
The filing does not provide specific quarterly or annual financial guidance. Management stated that operating needs, debt service, capital expenditures, and lease payments are expected to be funded through operating cash flow, cash on hand, and available revolving-credit capacity.
- Forward-looking results may be affected by economic conditions, reduced client spending, financial-services industry consolidation or failures, changes in client demand, competitive pricing, execution of Fiserv 2.0 initiatives, and compliance with government and privacy regulations.
- Interim results are not necessarily indicative of full-year results.
- Legal proceedings arise in the normal course of business; management does not expect resulting liabilities, if any, to have a material adverse effect on the financial statements.
- The company reported no material change in internal control over financial reporting, and management concluded that disclosure controls and procedures were effective as of March 31, 2010.
Important Facts for Investors to Verify
- Whether the decline in product revenue and segment operating income persists, particularly in output solutions, check processing, software licenses, and specialty consulting.
- The maturity and refinancing requirements for the term loan and senior notes, including the March 2011 revolving-credit expiration and November 2012 debt maturities.
- Compliance with leverage and interest-coverage covenants and the availability of the reported $870 million revolving-credit capacity.
- The sustainability of operating cash flow after debt repayment, capital expenditures, share repurchases, and potential acquisitions.
- The effect of acquisition-related intangible amortization, CheckFree integration costs, severance charges, and discontinued operations on comparability.
- The assumptions and valuation inputs supporting the company’s Level 3 investments and interest-rate hedge valuations.