Fiserv, Inc. 2013 Form 10-K Summary
Business Context and Reporting Period
Fiserv is a global financial-services technology provider serving approximately 14,500 clients, primarily in the United States. Its Payments segment provides electronic payments, card processing, digital banking, bill payment, person-to-person payments and related services. Its Financial segment provides account processing, item processing, lending and other technology services to financial institutions.
The filing covers the fiscal year ended December 31, 2013. The company reports recurring, account- and transaction-based revenue, with processing and services representing 84% of consolidated revenue. Approximately 7% of revenue was generated outside the United States. The filing also provides unaudited fourth-quarter results.
Financial Performance and Key Metrics
| Metric | 2013 | 2012 | Change |
|---|---|---|---|
| Total revenue | $4.814 billion | $4.436 billion | Up 9% |
| Processing and services revenue | $4.035 billion | $3.663 billion | Up 10% |
| Product revenue | $779 million | $773 million | Up 1% |
| Operating income | $1.061 billion | $1.048 billion | Up 1% |
| Operating margin | 22.0% | 23.6% | Down 160 basis points |
| Income from continuing operations | $650 million | $592 million | Up 10% |
| Net income | $648 million | $611 million | Up 6% |
| Diluted EPS from continuing operations | $2.44 | $2.15 | Up 13% |
| Operating cash flow | $1.039 billion | $826 million | Up 26% |
Fourth-quarter 2013 revenue was $1.263 billion, operating income was $297 million, income from continuing operations was $220 million and diluted continuing-operations EPS was $0.84. The processing-services cost ratio improved to 51.6% from 52.9%, while product costs increased to 89.2% of product revenue from 81.2%.
Payments revenue increased 4% to $2.552 billion and operating income increased 7% to $702 million, producing a 27.5% margin. Financial revenue increased 13% to $2.309 billion and operating income increased 14% to $745 million, producing a 32.2% margin.
At December 31, 2013, cash and cash equivalents were $400 million, total assets were $9.513 billion and shareholders’ equity was $3.585 billion. Long-term debt, including current maturities, was $3.848 billion. The company had no borrowings outstanding under its $2.0 billion revolving credit facility and was in compliance with debt covenants.
Capital expenditures were $236 million. The company repurchased $578 million of common stock and did not pay dividends. Subscriber funds invested in connection with electronic payments, which are not included on the balance sheet, were approximately $1.7 billion at year-end.
Material Changes Versus the Prior Comparable Period
- Revenue growth accelerated from 3% in 2012 to 9% in 2013, driven primarily by the Financial segment and the Open Solutions acquisition.
- Open Solutions, acquired in January 2013, contributed $270 million of revenue and $12 million of operating income and added approximately $960 million of assumed debt.
- Operating margin declined because of $115 million of Open Solutions-related acquired-intangible amortization, merger and integration costs and a $30 million non-cash impairment charge related to replacing the Acumen system with DNA.
- Corporate and Other operating loss increased by $125 million to $386 million, primarily because of Open Solutions-related costs and amortization.
- Operating cash flow increased $213 million, benefiting from higher earnings, favorable working-capital timing and the absence of the $88 million interest-rate hedge settlement paid in 2012.
- Debt increased by $618 million year over year, principally because of debt assumed in the Open Solutions acquisition. In October 2013, Fiserv obtained a $900 million term loan and used the proceeds to repay revolving-credit borrowings.
- Fiserv sold Club Solutions in March 2013. The business was reported as discontinued operations and generated a $2 million loss in 2013, compared with $19 million of income in 2012.
Guidance, Outlook, Commentary, Risks and Unusual Items
Management identified 2014 priorities of building high-quality revenue growth while meeting earnings goals, expanding the company’s share of strategic client solutions, and delivering innovation and integration. The filing does not provide specific numerical 2014 revenue or earnings guidance.
Management emphasized the resilience of the recurring, fee-based and largely non-discretionary business model, long-term client relationships, electronic-payment growth, digital channels and the trend toward outsourcing technology by financial institutions.
- StoneRiver, in which Fiserv owns 49%, completed a partial divestiture in the fourth quarter. Fiserv recognized $71 million of its share of the gain and $17 million of related tax expense. StoneRiver contributed $80 million of income in 2013 versus $11 million in 2012, making this a material non-recurring contributor to earnings.
- Goodwill and intangible assets represented 77% of total assets at year-end. The 2013 impairment tests found no goodwill or acquired-intangible impairment, but future adverse changes in operating performance, market conditions or valuation assumptions could result in material charges.
- Key risks include economic weakness affecting financial-institution clients and transaction volumes, intense competition, client contract non-renewals, technology and software defects, cyberattacks, operational interruptions, regulatory changes including Dodd-Frank and CFPB oversight, acquisition integration, intellectual-property claims and the company’s leverage.
- A 1% increase in borrowing rates was estimated to increase 2014 annual interest expense by approximately $9 million. A 1% increase in applicable rates on subscriber-fund investments was estimated to increase annual pre-tax income by approximately $10 million.
- Debt ratings were Baa2 from Moody’s and BBB- from Standard & Poor’s, each with a stable outlook. A downgrade below investment grade could increase interest rates on outstanding debt by up to two percentage points.
- Contractual obligations totaled $5.232 billion, including $4.588 billion of debt principal and interest, $333 million of operating leases, $251 million of purchase obligations and $60 million of income-tax obligations.
Investor Verification Checklist
- Verify the sustainability of 2013 earnings excluding the $71 million StoneRiver gain and the related tax expense.
- Assess whether Open Solutions integration costs, amortization and the $30 million impairment charge were non-recurring and whether expected synergies are being realized.
- Reconcile revenue and margin growth by Payments and Financial segments, including the effect of client migrations and contract-renewal pricing.
- Review debt maturities, the variable-rate $900 million term loan, covenant headroom and refinancing requirements.
- Monitor the concentration of goodwill and intangible assets and the assumptions supporting the absence of impairment.
- Confirm future capital allocation among debt repayment, acquisitions, share repurchases and internal investment, given that no dividend was expected.