FISERV INC. 10-Q Summary: Period Ended June 30, 2006
Business Context and Reporting Period
This is a Quarterly Report (Form 10-Q) for FISERV, INC., a provider of information management systems and services to the financial and health benefits industries. The report covers the three and six-month periods ended June 30, 2006. The company operates through three segments: Financial, Health, and Investment. As of July 24, 2006, there were approximately 174.2 million shares of common stock outstanding.
Key Financial Metrics
| Metric (Six Months Ended June 30, 2006) | Value (in millions) |
|---|---|
| Total Revenues | $2,189.9 |
| Net Income | $233.9 |
| Diluted EPS (Total) | $1.30 |
| Operating Income | $377.1 |
| Operating Margin | 17.2% |
| Free Cash Flow | $187.3 |
| Long-Term Debt | $783.1 |
| Cash and Cash Equivalents | $152.0 |
Material Changes vs. Prior Period
- Revenue Growth: Total revenues increased 11% ($220.3 million) for the six months ended June 30, 2006, compared to the same period in 2005. Internal revenue growth was 9%, with the remainder driven by acquisitions.
- Profitability: Net income decreased 8% to $233.9 million from $253.0 million in the prior year. This decline was primarily due to the absence of a $43.5 million one-time realized gain from the sale of Bisys Group, Inc. investment in 2005 and increased share-based compensation expenses.
- Operating Income: Operating income increased slightly by 1% ($1.9 million) to $377.1 million. Operating margins decreased approximately 2 percentage points year-over-year.
- Segment Performance:
- Financial: Revenues up 10%; Operating income up 2%.
- Health: Revenues up 16%; Operating income down 7% due to investments in consumer-directed health care.
- Investment: Revenues up 4%; Operating income down 1%.
- Discontinued Operations: The company recognized a $6.7 million gain in the second quarter of 2006 related to a contingent payment from the 2005 sale of its securities clearing business to Fidelity.
Guidance, Outlook, and Risks
- Accounting Changes: The company adopted SFAS 123R (Share-Based Payment) on January 1, 2006, resulting in approximately $18.1 million of incremental expense for the six-month period, negatively impacting margins by about 1 percentage point.
- Outlook: Management expects the effective income tax rate for the remainder of 2006 to be 38.5%. The company plans to continue pursuing acquisitions and reducing expenses through operational efficiencies.
- Liquidity and Capital: The company has a $900 million revolving credit facility with $500 million utilized as of June 30, 2006. In July 2006, a $500 million commercial paper program was initiated. The company repurchased $349.5 million of stock in the first six months of 2006.
- Risks and Contingencies:
- SEC Investigation: The company is investigating an indemnification notice regarding documentation maintenance by its former subsidiary, Fiserv Securities, Inc. (FSI). The outcome is currently unpredictable.
- Contract Termination Fees: Reduced contract termination fees ($12.5 million less than prior year) negatively impacted year-to-date margins.
- Pass-Through Costs: Growth in pharmacy management and output solutions businesses includes significant pass-through costs (prescription products and customer reimbursements) that inflate revenue and expense figures while compressing operating margins.
Investor Verification Checklist
- Verify the impact of the SFAS 123R adoption on future quarters, as the $18.1 million expense is a recurring item going forward.
- Monitor the status of the indemnification notice regarding FSI documentation to assess potential liability.
- Review the "Adjusted Revenue" metrics to understand organic growth excluding pass-through costs (prescription products and customer reimbursements).
- Confirm the sustainability of the 9% internal revenue growth rate, particularly in the Financial segment where contract termination fees are volatile.
- Assess the company's leverage ratio given the $783.1 million in long-term debt and the commitment to continue share repurchases.