Fiserv, Inc. Form 10-Q Summary
Business Context and Reporting Period
Fiserv provides financial-services technology, including account processing, electronic payments, digital banking, lending, item processing and related services to approximately 16,000 clients. Operations comprise Payments and Financial Institution Services. The filing covers the three and nine months ended September 30, 2012, compared with the same periods in 2011; balance-sheet amounts are compared with December 31, 2011. Results are unaudited.
Financial Performance and Position
| Metric | Q3 2012 | Q3 2011 | 9M 2012 | 9M 2011 |
|---|---|---|---|---|
| Total revenue | $1.118 billion | $1.063 billion | $3.326 billion | $3.176 billion |
| Operating income | $267 million | $243 million | $767 million | $715 million |
| Operating margin | 23.9% | 22.9% | 23.1% | 22.5% |
| Income from continuing operations | $142 million | $127 million | $438 million | $338 million |
| Net income | $139 million | $127 million | $432 million | $329 million |
| Diluted EPS from continuing operations | $1.03 | $0.89 | $3.16 | $2.33 |
| Operating cash flow | Not provided for the quarter | Not provided for the quarter | $548 million | $681 million |
- Processing and services revenue increased 6% in the quarter and 5% year to date; product revenue increased 2% and 3%, respectively.
- Payments revenue increased 5% in the quarter and 6% year to date, while Financial revenue increased 5% and 4%, respectively.
- September 30, 2012 cash and cash equivalents were $307 million, compared with $337 million at year-end 2011.
- Total debt, including current maturities, was approximately $3.449 billion at September 30, 2012, compared with $3.395 billion at December 31, 2011. Estimated fair value of total debt was $3.7 billion.
- Shareholders’ equity was $3.258 billion at both September 30, 2012 and December 31, 2011.
- Capital expenditures were $146 million in the first nine months, versus $144 million in the prior-year period. Treasury stock purchases were $577 million, while the cash-flow statement reports $580 million of purchases.
Material Changes Versus Prior Comparable Period
- Revenue rose 5% in both the third quarter and first nine months. Acquired businesses contributed $11 million of quarterly revenue and $41 million year to date, primarily reflecting CashEdge.
- Operating income increased 10% in the quarter and 7% year to date. Margin improved by 100 basis points in the quarter and 60 basis points year to date, primarily from operating leverage and efficiency in recurring-revenue businesses.
- Financial segment operating income increased 15% in the quarter and 10% year to date, with margin expanding to 32.1% and 31.6%, respectively. Payments margin declined to 27.3% in the quarter and 26.5% year to date due to product investment, implementation costs, postage pass-through costs and lower electronic bill-payment revenue.
- Year-to-date operating cash flow declined 20%, primarily because of an $88 million settlement payment for forward-starting interest-rate swaps, higher income-tax payments and working-capital changes.
- The prior-year periods included losses on early debt extinguishment of $24 million in the quarter and $85 million year to date; no such loss was recorded in 2012.
- Weighted-average diluted shares declined to 136.6 million in the quarter and 138.3 million year to date, from 142.6 million and 144.8 million, respectively, reflecting share repurchases and other share activity.
Guidance, Outlook, Risks and Unusual Items
- Management anticipated a full-year 2012 effective tax rate of approximately 34% and a fourth-quarter rate of approximately 37%.
- Management stated that liquidity needs should be met through operating cash flow, $307 million of cash and available revolving-credit capacity. The amended revolving credit facility provides $2.0 billion of capacity, expires August 1, 2017, and had no borrowings outstanding at September 30, 2012.
- Fiserv issued $700 million of 3.5% senior notes due October 2022, primarily to repay term-loan borrowings due November 2012. A $500 million term-loan balance remained classified as long-term because management intended to refinance it on a long-term basis.
- The company settled $550 million of forward-starting swaps for $88 million, recorded approximately $4 million of hedge ineffectiveness expense, and expects to recognize approximately $14 million of related accumulated other comprehensive loss in interest expense over the next twelve months.
- Management cited cautious financial-institution technology spending, economic conditions, client demand, competition, regulatory changes including Dodd-Frank, privacy compliance, acquisition integration, client consolidation and government actions affecting financial institutions as risks.
- Revenue is predominantly recurring and transaction-based under contracts generally lasting three to five years. Management noted that client spending decisions often occur later in the year, resulting in a greater proportion of annual revenue and earnings in the second half.
- The filing states that ordinary-course litigation is not expected to have a material adverse effect, although commitments and contingencies exist.
Most Important Facts for Investors to Verify
- Verify refinancing or repayment of the $500 million term loan that matured in November 2012 and the resulting debt balance and interest expense.
- Assess whether the 2012 tax-rate outlook of approximately 34% for the full year and 37% for the fourth quarter was achieved.
- Monitor operating cash flow conversion, particularly the effects of hedge settlements, income-tax payments, incentive compensation and working capital.
- Evaluate sustainability of Payments segment growth and margin pressure from product investments, implementation costs, postage pass-through activity and lost bill-payment clients.
- Track share repurchases, remaining authorization of approximately 6.2 million shares at September 30, 2012, and their effect on diluted EPS and leverage.
- Review acquisition integration, client consolidation, regulatory developments and the company’s debt-covenant compliance.