FISERV INC. 10-Q Summary: Period Ended September 30, 2007
Business Context and Reporting Period
This is a Quarterly Report (Form 10-Q) for FISERV, INC., a provider of integrated information management systems and services for financial institutions and insurance carriers. The report covers the three and nine-month periods ended September 30, 2007. The company operates two primary segments: Financial Institution Services and Insurance Services. Significant corporate activity during the period includes the pending sale of the Investment Support Services (Fiserv ISS) segment, the pending sale of health businesses to United Healthcare, and the pending acquisition of CheckFree Corporation.
Key Financial Metrics
| Metric (in millions) | Q3 2007 | Q3 2006 | 9M 2007 | 9M 2006 |
|---|---|---|---|---|
| Total Revenues | $1,173.7 | $1,122.5 | $3,538.9 | $3,242.3 |
| Operating Income | $206.0 | $180.4 | $574.9 | $543.9 |
| Net Income (Continuing Ops) | $119.9 | $105.2 | $333.7 | $320.5 |
| Diluted EPS (Continuing Ops) | $0.72 | $0.60 | $1.97 | $1.80 |
| Free Cash Flow (9M) | $340.0 (2007) vs $292.1 (2006) | |||
| Long-Term Debt (Outstanding) | $972.0 (including current maturities) | |||
| Cash and Equivalents | $161.3 (as of Sept 30, 2007) |
Material Changes vs. Prior Period
- Revenue Growth: Total revenues increased 5% in Q3 and 9% for the nine months ended Sept 30, 2007, compared to 2006. Internal revenue growth was 4% in Q3 and 6% for the nine-month period, with the remainder attributed to acquisitions.
- Segment Performance:
- Financial Segment: Revenues grew 5% (Q3) and 7% (9M). Operating income increased 17% (Q3) and 18% (9M), with operating margins improving to 23.0% (Q3) and 21.9% (9M) due to higher-margin revenues and efficiencies in core processing and payments.
- Insurance Segment: Revenues grew 5% (Q3) and 14% (9M). However, operating income declined 37% for the nine-month period due to a $31.7 million decrease in flood claims processing revenue (high-margin) and $16.9 million in charges related to ceasing a technology platform investment.
- Discontinued Operations: Income from discontinued operations (Fiserv ISS) decreased significantly year-over-year due to transaction costs and the absence of a $6.7 million gain recorded in 2006 related to a prior sale.
- Capital Allocation: The company repurchased 8.6 million shares of common stock for $469.2 million during the first nine months of 2007.
Guidance, Outlook, and Risks
- Pending Transactions:
- CheckFree Acquisition: Agreed to acquire CheckFree for approximately $4.4 billion in cash. Expected to close by Q4 2007. Financing includes a $5 billion bridge commitment and planned issuance of senior notes and term loans.
- Dispositions: Agreed to sell Fiserv ISS (expected proceeds ~$355 million + contingent) and health businesses to United Healthcare (expected proceeds $775 million). Both expected to close by end of 2007 or Q1 2008.
- Management Commentary: Management expects the effective income tax rate for the remainder of 2007 to be 38.5%. The company anticipates using proceeds from dispositions and free cash flow to repay debt incurred for the CheckFree acquisition.
- Risks and Contingencies:
- Legal Proceedings: A class action lawsuit regarding an alleged Ponzi scheme involving Fiserv Trust (discontinued operations) is pending; no accrual made as outcome is indeterminable. A separate class action regarding the CheckFree acquisition disclosure was filed but a motion for a preliminary injunction was denied.
- Market Risk: The company has entered into treasury locks and interest rate swaps to hedge financing costs for the CheckFree acquisition. A 50 basis point decrease in Treasury rates would increase termination costs by approximately $60 million.
- Integration Risk: Successful integration of CheckFree is critical to realizing estimated $100 million in cost savings and $125 million in revenue synergies.
Investor Verification Checklist
- Verify the closing status and regulatory approval progress for the CheckFree acquisition and the Fiserv ISS/Health business sales.
- Monitor the Insurance segment margins, specifically the impact of the decline in flood claims revenue and the low-margin pharmacy management business.
- Review the financing terms for the CheckFree acquisition, including the final interest rates on the new term loan and senior notes.
- Track the litigation outcomes regarding the Fiserv Trust Ponzi scheme allegations and the CheckFree proxy statement lawsuit.
- Assess the company's ability to meet debt covenants post-acquisition, specifically the leverage ratio limits under the amended credit facility.