FISERV INC. 10-Q Summary: Period Ended June 30, 2003
Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended June 30, 2003, and the six-month period ended June 30, 2003. Fiserv, Inc. is an independent provider of financial data processing systems and related information management services. In the second quarter of 2003, the Company reorganized its reportable segments to include a new "Health plan management services" segment, reflecting recent growth in that area. The Company's primary segments are Financial institution outsourcing, systems and services (FIS); Health plan management services; Securities processing and trust services; and All other and corporate.
Key Financial Metrics
Revenue and Profit (Six Months Ended June 30, 2003):
- Total Revenues: $1,446.1 million (Processing and services: $1,283.9 million).
- Operating Income: $256.7 million.
- Net Income: $152.6 million.
- Diluted Earnings Per Share (EPS): $0.78.
- Operating Margin: 20% of processing and services revenues.
Cash Flow and Liquidity:
- Cash and Cash Equivalents: $291.1 million as of June 30, 2003 (up from $227.2 million at year-end 2002).
- Net Cash Provided by Operating Activities: $181.3 million for the six months ended June 30, 2003.
- Net Cash Used in Investing Activities: $150.1 million, driven by $190.3 million in acquisitions and $80.9 million in capital expenditures.
- Net Cash Provided by Financing Activities: $32.7 million.
Debt and Capital Structure:
- Long-Term Debt: $499.3 million.
- Short-Term Borrowings: $206.0 million.
- Credit Facility: $510.0 million total capacity with $295.7 million available as of June 30, 2003.
- Shareholders' Equity: $2.02 billion.
Material Changes vs. Prior Period
Revenue Growth: Total processing and services revenues increased 14% year-over-year for the six months ended June 30, 2003. This growth was driven by a 13% increase in the FIS segment and a 45% increase in the Health plan management services segment. Internal revenue growth was approximately 3%, with the remaining 11% attributed to acquisitions.
Profitability: Operating income increased 16% to $256.7 million, and net income increased 16% to $152.6 million compared to the same period in 2002. The effective income tax rate remained stable at 39%.
Segment Performance:
- FIS Segment: Operating income increased 17% to $224.9 million.
- Health Plan Management: Operating income increased 37% to $23.0 million.
- Securities Processing: Operating income decreased 8% to $13.8 million, impacted by a weak retail securities trading environment and lower interest rates.
Guidance, Outlook, Risks, and Unusual Items
Acquisitions and Contingencies:
- The Company completed four acquisitions in the first six months of 2003 for $157.2 million in cash and stock. On July 14, 2003, it acquired the EDS Credit Union Industry Group for $217.6 million.
- Contingent consideration of up to $175.0 million may be payable through 2006 if acquired entities meet specific operating income targets.
Legal Proceedings:
- The Company settled its legal action against E*TRADE Securities, Inc., receiving approximately $23.0 million. The bond's net carrying value prior to settlement was $23.9 million.
- The Securities processing segment incurred a revenue decrease of $17.0 million due to a fraudulent trading scheme at a broker-dealer client. The Company has insurance that may cover the loss but has not recorded a recovery pending claim resolution.
Debt Issuance:
- In the second quarter, the Company issued $250.0 million in five-year notes (due 2008) at fixed rates of 4% and 3%. Proceeds were used to repay credit facilities and fund acquisitions.
Risks: The filing includes a Safe Harbor statement noting that forward-looking statements are subject to risks including economic, competitive, governmental, and technological factors. Actual results may differ materially from expectations.
Investor Verification Checklist
- Verify the impact of the $17.0 million revenue reduction in the Securities segment due to the fraudulent trading scheme and the status of the insurance claim.
- Monitor the integration and performance of the EDS Credit Union Industry Group acquisition completed in July 2003.
- Review the potential cash outflow for contingent acquisition payments (up to $175.0 million) based on future operating income targets.
- Assess the sustainability of the 45% revenue growth in the Health plan management services segment.
- Confirm compliance with debt covenants, specifically the fixed charge coverage ratio and total debt to EBITDA limits, given the new debt issuance.