Fiserv, Inc. 2019 Form 10-K Summary
Business Context and Reporting Period
Fiserv is a global financial-technology provider serving banks, credit unions, financial institutions and merchants through payment processing, merchant acquiring, digital banking, account processing, card services, fraud management and related technology. The filing covers the fiscal year ended December 31, 2019; fourth-quarter revenue was $4.045 billion and operating income was $478 million.
The July 29, 2019 acquisition of First Data materially changed the company’s scale, geographic mix and leverage. First Data results are included only from the acquisition date and contributed $4.078 billion of 2019 revenue and $1.031 billion of operating income.
Key Financial Metrics
| Metric | 2019 | 2018 | Change |
|---|---|---|---|
| Total revenue | $10.187 billion | $5.823 billion | Up 75% |
| Processing and services revenue | $8.573 billion | $4.975 billion | Up 72% |
| Product revenue | $1.614 billion | $848 million | Up 90% |
| Operating income | $1.609 billion | $1.753 billion | Down 8% |
| Operating margin | 15.8% | 30.1% | Down 1,430 bps |
| Income from continuing operations | $914 million | $1.187 billion | Down 23% |
| Net income attributable to Fiserv | $893 million | $1.187 billion | Down 25% |
| Diluted EPS from continuing operations | $1.71 | $2.87 | Down 40% |
| Cash flow from operations | $2.795 billion | $1.552 billion | Up 80% |
| Capital expenditures | $721 million | $360 million | Up 100% |
Net income attributable to Fiserv represented approximately 8.8% of revenue, while operating income represented 15.8% of revenue. Processing and services revenue accounted for 84.2% of consolidated revenue. International revenue represented approximately 12% of total revenue, compared with 6% in 2018.
Segment revenue and operating income were: First Data, $4.078 billion and $1.031 billion; Payments, $3.744 billion and $1.252 billion; and Financial, $2.407 billion and $805 million. Payments and Financial operating margins were 33.4% and 33.5%, respectively.
Liquidity, Debt and Balance Sheet
- Cash and cash equivalents were $893 million at December 31, 2019, including $591 million classified as available; $302 million was unavailable due to entity-level or joint-venture restrictions.
- Total debt, including current maturities, was $21.899 billion versus $5.959 billion in 2018. Debt increased primarily to fund the First Data acquisition and the repayment of $16.4 billion of First Data debt.
- Debt consisted primarily of $16.9 billion of fixed-rate senior notes and $4.0 billion of variable-rate term loans. Variable-rate debt totaled approximately $4.8 billion, including the term loans, revolving borrowings and receivables securitized loan.
- The company had $3.3 billion of available borrowing capacity under its revolving credit facility and stated that operating cash flow, cash and available borrowings should satisfy ordinary liquidity needs.
- A 1% increase in variable interest rates would reduce annual pretax income by approximately $48 million. The company was in compliance with its debt covenants at year-end.
- Total assets increased to $77.539 billion from $11.262 billion, largely because of the First Data acquisition. Goodwill and intangible assets represented approximately 69% of total assets.
Material Changes Versus the Prior Comparable Period
- The First Data acquisition added substantial revenue and operating income but also increased amortization, integration costs, interest expense and debt financing costs.
- Operating income declined despite sharply higher revenue. Corporate and Other operating loss increased by $1.312 billion, primarily due to $633 million of acquired-intangible amortization, $242 million of acquisition and integration-related costs, other First Data corporate expenses and a $48 million impairment charge.
- Interest expense increased to $473 million from $189 million, and debt financing activities generated $47 million of expense versus $14 million in 2018.
- Payments revenue increased 8% and operating income increased 12%; Financial revenue increased 1% and operating income increased 1%.
- Operating cash flow increased substantially, aided by the acquired business, improved operating results and working-capital timing, but capital expenditures doubled to $721 million.
- Share repurchases declined to $394 million from $1.91 billion. The company has never paid a common-stock dividend and does not anticipate paying one in the foreseeable future.
Guidance, Outlook, Management Commentary and Unusual Items
The filing does not provide a clear numerical 2020 earnings or revenue guidance range. Management’s stated priorities were to realize integration value from First Data, build high-quality recurring revenue, enhance digital and payment solutions, improve operational effectiveness, maintain capital discipline and deliver innovation.
- Management expects additional integration and restructuring costs over the next several years, but could not estimate the amounts because plans were not finalized. The company recorded $56 million of restructuring charges and $32 million of employee termination costs in 2019.
- The company expects to realign its business segments in the first quarter of 2020 after finalizing its new reporting structure and First Data integration plans.
- Fiserv completed the sale of a 60% interest in its Investment Services business on February 18, 2020 for $591 million of gross proceeds and expects an estimated pretax gain of approximately $430 million, including remeasurement of its retained 40% interest.
- Goodwill was not impaired in the fourth quarter of 2019, but First Data purchase accounting remained preliminary and subject to further measurement-period adjustments. No accumulated goodwill impairment existed at year-end.
- The company recorded a $48 million noncash impairment charge related to an international core account-processing platform.
- Merchant credit losses were $40 million, with $34 million reserved at year-end. Fiserv also had $400 million of guarantees on a joint venture’s term debt and $45 million of guarantees on its revolving facilities; no payments had been required.
- Legal proceedings accrued were $43 million, with estimated potential exposure beyond accrued amounts ranging from zero to approximately $50 million.
Principal Risks
- Failure to integrate First Data, achieve projected cost synergies or retain customers and partners could reduce earnings and increase costs.
- High leverage increases refinancing, interest-rate and covenant risks; a 1% increase in variable rates would reduce pretax income by approximately $48 million.
- Cybersecurity incidents, operational outages, fraud, merchant defaults and failures by vendors or other financial-system participants could result in financial losses, regulatory penalties and reputational damage.
- Competition, rapid technological change, pricing pressure, client contract renewals and financial-institution consolidation could affect revenue and margins.
- Goodwill and intangible assets are substantial, and impairment charges could materially reduce operating earnings.
- The company faces extensive payment-network, privacy, cybersecurity, consumer-protection, money-transmission, anti-money-laundering and other regulatory requirements.
Facts Investors Should Verify
- Progress toward First Data integration, targeted synergies and the magnitude and timing of remaining integration and restructuring costs.
- Debt reduction plans, refinancing of the $850 million of senior notes due in 2020, covenant headroom and sensitivity to variable interest rates.
- Organic revenue growth and margin trends in First Data, Payments and Financial, excluding acquisition effects.
- Goodwill and intangible-asset valuation assumptions, including customer retention, discount rates, royalty rates and future cash-flow projections.
- Effects of the Investment Services divestiture, the expected $430 million pretax gain and the economics of the retained 40% interest.
- Merchant credit losses, chargebacks, guarantees and the outcome of legal, tax and regulatory contingencies.
- Integration of First Data’s financial reporting controls: management excluded First Data from its 2019 internal-control assessment, although First Data represented 26% of consolidated assets and 40% of consolidated revenue for the relevant period.