Fiserv, Inc. 2006 Annual Report (10-K) Summary
Business Context and Reporting Period
This report covers the fiscal year ended December 31, 2006. Fiserv, Inc. provides integrated information management systems and services, including transaction processing, business process outsourcing, and software solutions. The company serves over 18,000 clients globally, primarily in the United States, across three segments: Financial Institution Services, Insurance Services, and Investment Support Services. In 2006, the company reorganized its reporting segments to align with its "Fiserv 2.0" strategic initiative, focusing on integrated technology solutions.
Key Financial Metrics
| Metric | 2006 | 2005 |
|---|---|---|
| Total Revenues | $4,544.2 million | $4,059.5 million |
| Operating Income | $744.3 million | $745.4 million |
| Net Income | $449.9 million | $516.4 million |
| Diluted EPS (Continuing Ops) | $2.50 | $2.68 |
| Operating Margin | 16.4% | 18.4% |
| Free Cash Flow | $447.5 million | $436.2 million |
| Long-Term Debt | $747.3 million | $595.4 million |
| Cash and Cash Equivalents | $185.3 million | $184.5 million |
Material Changes vs. Prior Period
- Revenue Growth: Total revenues increased 12% ($484.7 million) compared to 2005. Internal revenue growth was 9%, with the remainder driven by acquisitions. Product revenues surged 30% due to new clients in pharmacy management and workers' compensation businesses.
- Profitability Decline: Net income decreased 13% to $449.9 million. This decline was primarily due to the absence of $86.8 million in realized gains from the sale of investments recorded in 2005, a $34.5 million decrease in high-margin contract termination fees, and increased share-based compensation expenses ($24.5 million) following the adoption of SFAS 123R.
- Segment Performance:
- Financial: Revenues up 9%; Operating income down 3% due to lower termination fees and new accounting standards.
- Insurance: Revenues up 20%; Operating income up 11%, driven by pharmacy and workers' compensation growth, though margins were compressed by low-margin prescription product costs.
- Investment: Revenues up 2%; Operating income flat, impacted by lower investment income due to strong equity markets reducing deposit levels.
- Acquisitions: The company acquired seven businesses in 2006 with combined annual revenues exceeding $115 million, including CareGain, InsureWorx, and Insurance Wholesalers.
Guidance, Outlook, and Risks
- Strategy (Fiserv 2.0): Management is focusing on deep industry expertise, strong competitive positions, and long-term client relationships. Capital allocation will prioritize investments with the best long-term growth prospects, including share repurchases and acquisitions.
- Capital Allocation: In 2006, the company repurchased 12.7 million shares for $560.1 million. On January 31, 2007, the Board authorized an additional 10 million share repurchase program.
- Liquidity: The company maintains a $900 million revolving credit facility (expandable to $1.25 billion) and a $500 million commercial paper program. As of year-end, $435 million was available for borrowing.
- Risks and Contingencies:
- Legal Proceedings: A class-action lawsuit was certified in February 2007 against Fiserv Trust Company regarding an alleged Ponzi scheme, seeking $120 million in compensatory damages and punitive damages. Management intends to contest vigorously but cannot predict the outcome.
- Market Risks: Exposure to interest rate risk and market price risk on investments. A 1% increase in borrowing rates would increase annual interest expense by approximately $4.8 million.
- Operational Risks: Risks related to security breaches, consolidation in the financial services industry, and the ability to renew client contracts at favorable terms.
Investor Verification Checklist
- Verify the impact of the $34.5 million decrease in contract termination fees on future earnings stability, as these fees are volatile and non-recurring.
- Assess the long-term margin implications of the pharmacy management business, which generates significant revenue but operates on low single-digit margins.
- Monitor the status of the Fiserv Trust Company litigation regarding the alleged Ponzi scheme and potential indemnification liabilities.
- Review the integration progress of the seven 2006 acquisitions to ensure expected synergies and revenue targets are met.
- Confirm the company's ability to maintain debt covenants (consolidated indebtedness limited to 3.5x EBITDA) given the increase in long-term debt to $747.3 million.