FISERV INC. 10-Q Summary: Quarter Ended September 30, 2002
Business Context and Reporting Period
This is an unaudited quarterly report (Form 10-Q) for Fiserv, Inc., a leading independent provider of financial data processing systems and information management services. The report covers the three and nine-month periods ended September 30, 2002. The company operates through three segments: Financial institution outsourcing, systems and services; Securities processing and trust services; and All other and corporate.
Key Financial Metrics
| Metric | Q3 2002 | Q3 2001 | 9M 2002 | 9M 2001 |
|---|---|---|---|---|
| Total Revenues | $635.7M | $539.2M | $1,900.0M | $1,610.5M |
| Processing & Services Revenue | $563.7M | $476.1M | $1,686.5M | $1,419.6M |
| Operating Income | $109.8M | $89.2M | $329.2M | $264.2M |
| Net Income | $66.2M | $52.6M | $197.9M | $155.4M |
| Diluted EPS | $0.34 | $0.27 | $1.01 | $0.81 |
| Operating Margin (excl. reimbursements) | 19.5% | 18.7% | 19.5% | 18.6% |
| Cash from Operations (9M) | $291.9M | |||
| Short-term Borrowings | $186.2M | $112.8M (Dec 2001) | ||
| Long-term Debt | $260.7M | $343.1M (Dec 2001) |
Material Changes vs. Prior Period
- Revenue Growth: Total revenues increased 17.9% year-over-year for the quarter and 18.0% for the nine-month period. Processing and services revenue grew 18.4% in Q3 and 18.8% year-to-date.
- Profitability: Operating income rose 23.1% in Q3 and 24.6% year-to-date. Net income increased 25.7% in Q3 and 27.4% year-to-date.
- Accounting Changes: The company adopted SFAS No. 142 (Goodwill and Other Intangible Assets) on Jan 1, 2002, discontinuing goodwill amortization. This reduced expenses by approximately $18.0 million for the nine months ended Sept 30, 2002. Additionally, the company adopted EITF Issue No. 01-14, reclassifying customer reimbursements as revenue and expense, increasing reported revenue and cost of revenue by $72.0 million for Q3 2002.
- Segment Performance: The Financial institution outsourcing segment saw strong growth ($296.0M increase year-to-date). Conversely, the Securities processing segment declined $23.8 million year-to-date due to weakness in U.S. retail financial markets.
- Liquidity: Cash and cash equivalents increased from $136.1M (Dec 2001) to $218.0M (Sept 2002). Short-term borrowings increased to $186.2M, while long-term debt decreased to $260.7M.
Guidance, Outlook, and Risks
- Outlook: Management believes cash flow from operations and available funds are adequate to meet funding requirements. The company continues to pursue acquisitions of complementary businesses.
- Stock Repurchase: Approximately 2,026,000 shares remain available under the 1999 repurchase authorization. The company purchased $24.0M of treasury stock in the first nine months of 2002.
- Risks: The company faces risks related to economic conditions, competition, and the prolonged weakness in U.S. retail financial markets affecting the securities processing segment. There is a risk of impairment charges if the fair value of goodwill declines.
- Legal Contingency: 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.
Investor Verification Checklist
- Verify the impact of the E*TRADE legal dispute on future cash flows and potential impairment of the $27.0 million bond asset.
- Assess the sustainability of revenue growth in the Financial institution outsourcing segment versus the decline in the Securities processing segment.
- Review the assumptions used in the annual goodwill impairment testing under SFAS No. 142, given the significant balance of $1.09 billion.
- Monitor the company's capital allocation strategy, specifically the balance between acquisitions, capital expenditures, and debt reduction.
- Confirm the effectiveness of the new revenue recognition policy (EITF 01-14) on future margin reporting.