FISERV INC. 10-Q Summary: Quarter Ended March 31, 2003
Business Context and Reporting Period
This report covers the quarterly period ended March 31, 2003, for Fiserv, Inc., a leading independent provider of financial data processing systems and information management services. The company operates through three segments: Financial institution outsourcing, systems and services (FIS); Securities processing and trust services; and All other and corporate. As of April 15, 2003, there were 193,194,605 shares of common stock outstanding.
Key Financial Metrics
| Metric | Q1 2003 | Q1 2002 |
|---|---|---|
| Total Revenues | $707.5 million | $632.8 million |
| Processing and Services Revenues | $624.8 million | $560.7 million |
| Operating Income | $124.6 million | $109.4 million |
| Net Income | $74.2 million | $65.1 million |
| Diluted EPS | $0.38 | $0.33 |
| Operating Cash Flow | $142.1 million | $47.5 million |
| Cash and Equivalents (End of Period) | $182.2 million | $138.7 million |
| Long-Term Debt | $433.9 million | $482.8 million (Dec 2002) |
| Short-Term Borrowings | $170.5 million | $100.0 million (Dec 2002) |
Margins: Operating income margin on processing and services revenues was 20% in both 2003 and 2002. The effective income tax rate was 39%.
Material Changes vs. Prior Period
- Revenue Growth: Total revenues increased 12% year-over-year. Processing and services revenues grew 11%, driven by 2% internal growth (new clients, cross-sales, volume) and 9% from acquisitions.
- Segment Performance: The FIS segment operating income rose 17% to $119.6 million. Conversely, the Securities processing and trust services segment operating income declined 15% to $7.2 million due to market weakness and a specific loss event.
- Unusual Items: The Securities processing segment recognized a $17.0 million revenue decrease due to an apparently fraudulent trading scheme at a broker-dealer client. This was partially offset by a $15.8 million gain from the sale of investment securities. Management considers the loss highly unusual.
- Acquisitions: The company completed two acquisitions for $46.0 million in cash and $10.9 million in stock. Additionally, $33.1 million in cash and $20.6 million in stock were paid as contingent consideration for prior acquisitions.
- Cost Structure: Data processing costs and equipment rentals increased 34% year-over-year, largely due to the inclusion of EDS Corporation's Consumer Network Services acquired in late 2002.
Guidance, Outlook, and Risks
Capital Resources: On April 11, 2003, the company issued $150.0 million in 4% senior notes due in 2008 to repay debt and fund acquisitions. Management believes cash flow from operations and available funds are adequate for operating requirements and debt repayments.
Legal Proceedings: Fiserv has initiated legal action against E*TRADE Securities, Inc., regarding a bond with a carrying value of $27.0 million that E*TRADE refused to accept. Fiserv expects to recover the carrying value.
Stock-Based Compensation: The company follows APB Opinion No. 25 and recorded no stock-based compensation expense. Pro forma net income, had SFAS No. 123 been applied, would have been $68.0 million (EPS $0.35 diluted) compared to reported $74.2 million.
Risks: Forward-looking statements are subject to economic, competitive, and technological risks. The company notes continued weakness in international banking and U.S. retail financial markets.
Investor Verification Checklist
- Verify the status and potential recovery amount regarding the $17.0 million loss from the fraudulent trading scheme at the broker-dealer client.
- Confirm the outcome of the legal action against E*TRADE Securities regarding the $27.0 million bond dispute.
- Monitor the integration and cost structure impact of the EDS Consumer Network Services acquisition on future quarters.
- Review the renewal terms of the $89.0 million 364-day debt agreement due in the second quarter of 2003.
- Assess the impact of the $150.0 million senior note issuance on the company's leverage ratios and interest expense.