Fiserv, Inc. 2009 Q3 Form 10-Q Summary
Business context and reporting period
Fiserv provides transaction processing, electronic bill payment, business process outsourcing, document distribution, and software and systems solutions, primarily to financial institutions. The filing covers the unaudited three and nine months ended September 30, 2009, compared with the corresponding 2008 periods. The principal operating segments are Financial Institution Services and Payments and Industry Products; Corporate and Other includes corporate overhead, acquisition-related amortization, and eliminations.
Financial performance and key metrics
| Metric | Q3 2009 | Q3 2008 | 9M 2009 | 9M 2008 |
|---|---|---|---|---|
| Total revenue | $992 million | $1,038 million | $3,015 million | $3,547 million |
| Operating income | $231 million | $217 million | $690 million | $678 million |
| Operating margin | 23.3% | 20.9% | 22.9% | 19.1% |
| Income from continuing operations | $124 million | $75 million | $345 million | $278 million |
| Net income | $115 million | $78 million | $358 million | $507 million |
| Diluted EPS | $0.74 | $0.48 | $2.30 | $3.08 |
| Operating cash flow from continuing operations | Not separately provided | Not separately provided | $639 million | $577 million |
Processing and services revenue was $826 million in the quarter, down 1%, while product revenue was $166 million, down 19%. Nine-month processing and services revenue declined 6% and product revenue declined 42%. The filing attributes the revenue decline primarily to the 2008 sale of a 51% interest in Fiserv Insurance, lower software license and professional-services revenue, lower investment-services account volumes, foreign-exchange effects, and lower contract termination fees.
Cost efficiencies and improved business mix drove margin expansion. Financial segment operating margin increased to 29.6% from 26.5% in the quarter and to 29.6% from 27.3% for the nine months. Payments segment margin increased to 28.8% from 28.1% in the quarter and to 28.5% from 26.9% for the nine months.
At September 30, 2009, cash and cash equivalents were $278 million, compared with $230 million at December 31, 2008. Long-term debt, including current maturities, was $3.777 billion, down from $4.105 billion. The company reported $880 million of available borrowing capacity under its revolving credit facility, with $20 million outstanding. Shareholders’ equity was $2.914 billion.
Material changes versus the prior comparable period
- Third-quarter revenue decreased 4%, while nine-month revenue decreased 15%, largely reflecting the absence of Fiserv Insurance revenue following its 2008 disposition.
- Operating income increased 6% in the quarter and 2% year to date; operating margin expanded 240 basis points and 380 basis points, respectively.
- Income from continuing operations increased 65% in the quarter and 24% for the nine months.
- Net income and diluted EPS declined for the nine months because 2008 included substantial gains from discontinued operations, including gains on the sales of Fiserv Health and part of Fiserv ISS.
- Operating cash flow increased 11% to $639 million for the first nine months. Capital expenditures increased 9% to $151 million.
- The company repaid approximately $330 million of long-term debt and repurchased $128 million of common stock during the first nine months. Approximately 3.2 million shares remained authorized for repurchase at September 30, 2009.
Outlook, unusual items, risks, and contingencies
- On September 28, 2009, Fiserv agreed to sell its Loan Fulfillment Solutions business. The transaction was expected to close in the fourth quarter of 2009 and was classified as discontinued operations; management did not expect a significant after-tax gain or loss.
- The remaining Fiserv ISS disposition received FDIC approval in October 2009 but remained subject to customary closing conditions and state regulatory approval. The company anticipated approximately $125 million of proceeds, including tax benefits, from the Fiserv ISS and Fiserv LFS dispositions.
- Discontinued operations produced a $9 million loss in Q3 2009 and $13 million of income for the first nine months, versus $3 million and $229 million of income in the comparable 2008 periods.
- A $7 million tax benefit from the final settlement of a CheckFree purchase-accounting tax reserve contributed to the lower effective tax rate in Q3 2009. The effective tax rate was 33.7% versus 59.6% in Q3 2008.
- Fiserv loaned its 49%-owned insurance affiliate $67 million in July 2009; principal was due in 2013.
- Interest-rate swaps with $1.75 billion of notional value effectively fixed rates on floating-rate term-loan borrowings at approximately 4.5% before spreads and fees. The company expected to recognize approximately $45 million of related interest expense over the following twelve months.
- The company settled patent litigation with Leon Stambler in October 2009, receiving a license and release from liability. The settlement did not materially affect the financial statements.
- Management stated that liquidity needs were expected to be met through operating cash flow, cash on hand, and revolving-credit availability. The company was in compliance with its debt covenants at September 30, 2009.
- Key disclosed risks include economic weakness, client consolidation or failures, changes in client demand, competitive pricing, regulatory and privacy requirements, integration of CheckFree, and the timing and completion of pending dispositions.
Important facts for investors to verify
- Reconcile reported revenue and earnings trends for continuing operations with the effects of the Fiserv Insurance, Fiserv ISS, and Fiserv LFS dispositions.
- Confirm completion, proceeds, tax effects, and any gain or loss from the pending Fiserv ISS and Fiserv LFS transactions.
- Review debt maturities, especially the $375 million term-loan payment due in December 2010 and debt maturities in 2012.
- Assess whether margin expansion is sustainable after cost-reduction benefits, lower merger costs, and unusually low product costs associated with the discontinued insurance business.
- Monitor cash generation after capital expenditures, share repurchases, debt repayment, the $67 million affiliate loan, and potential disposition proceeds.
- Evaluate the impact of economic conditions, financial-institution consolidation, software-license demand, transaction volumes, and foreign-currency movements on future revenue.