Fiserv, Inc. 2011 Q3 Form 10-Q Summary
Business Context and Reporting Period
Fiserv provides financial-services technology, transaction processing, electronic payments, bill payment, account processing, software and related services to approximately 16,000 clients worldwide. Operations are reported through Payments, Financial Institution Services, and Corporate and Other. The filing covers the unaudited three and nine months ended September 30, 2011, compared with the corresponding 2010 periods.
Key Financial Metrics
| Metric | Q3 2011 | Q3 2010 | 9M 2011 | 9M 2010 |
|---|---|---|---|---|
| Total revenue | $1,063 million | $1,025 million | $3,176 million | $3,055 million |
| Operating income | $243 million | $251 million | $715 million | $740 million |
| Operating margin | 22.9% | 24.4% | 22.5% | 24.2% |
| Income from continuing operations | $127 million | $134 million | $338 million | $387 million |
| Net income | $127 million | $132 million | $329 million | $380 million |
| Diluted EPS | $0.89 | $0.87 | $2.27 | $2.49 |
| Operating cash flow from continuing operations | Not separately provided | Not separately provided | $681 million | $654 million |
Processing and services revenue was $882 million in the third quarter and $2.628 billion for the first nine months. Product revenue was $181 million and $548 million, respectively. Approximate net margins were 11.9% for the third quarter and 10.4% for the first nine months, based on reported net income and revenue.
At September 30, 2011, cash and cash equivalents were $281 million, compared with $563 million at December 31, 2010. Total debt, including current maturities, was approximately $3.518 billion, compared with $3.356 billion at year-end 2010. The company had $120 million drawn on its $1.0 billion revolving credit facility, $28 million of letters of credit, and $852 million of available borrowings.
Capital expenditures were $144 million during the first nine months, compared with $129 million in 2010. Free cash flow before acquisitions and other investing items was approximately $537 million, calculated as operating cash flow less capital expenditures.
Material Changes Versus the Prior Comparable Period
- Revenue increased 4% in both the third quarter and first nine months. Payments revenue increased 7% in both periods, while Financial revenue was flat in the quarter and increased 1% year to date.
- Operating income declined 3% in both comparison periods. Operating margin decreased 150 basis points in the quarter and 170 basis points for the first nine months.
- Higher expenses for product development and support, postage pass-through activity, merger and integration work, legal costs, and severance contributed to margin pressure. Corporate and Other operating losses increased by $11 million in the quarter and $54 million year to date.
- Net income for the first nine months declined $51 million, primarily reflecting lower operating income and $85 million of pretax losses on early debt extinguishment. The company also recognized $18 million of employee severance expense in the first quarter.
- Payments segment operating income increased 2% in the quarter and 5% year to date; Financial segment operating income was flat in the quarter and increased 1% year to date.
- Cash flow from continuing operations increased 4% to $681 million, despite lower reported income, reflecting noncash amortization, the debt extinguishment charge and other adjustments.
- Weighted-average diluted shares declined to 142.6 million in the quarter and 144.8 million year to date, from 150.9 million and 152.4 million, respectively, primarily reflecting share repurchases.
Guidance, Outlook, Risks and Unusual Items
Management stated that its 2011 priorities were to deliver higher-quality revenue growth and increase earnings per share versus 2010, expand client relationships, and develop differentiated products. The filing does not provide a specific full-year numerical earnings or revenue guidance range.
Fiserv acquired CashEdge in September 2011 for approximately $460 million, net of cash acquired, to advance its digital-payments strategy. It also acquired M-Com and two other companies earlier in 2011 for approximately $50 million. The acquisitions added approximately $320 million of preliminary CashEdge goodwill and increased acquisition-related intangible assets.
The company issued $1.0 billion of senior notes due in 2016 and 2021 and refinanced its 2012 senior notes. Premiums and related costs generated $85 million of pretax losses on early debt extinguishment during the first nine months. Interest-rate swaps and forward-starting swaps had total notional values of $1.0 billion and $550 million, respectively; approximately $45 million of hedge-related amounts were expected to be recognized in interest expense over the following twelve months.
Key risks identified include weak economic conditions, reduced client spending, financial-institution failures or consolidation, regulatory changes including Dodd-Frank, competitive pricing, changes in client demand, privacy and regulatory compliance, acquisition integration, and execution of strategic initiatives. Management reported compliance with debt covenants and effective disclosure controls as of September 30, 2011. Routine litigation was not expected to have a material adverse effect, according to management.
Important Facts for Investors to Verify
- Assess whether the 4% revenue growth and Payments-led performance can offset continued margin compression and higher Corporate and Other costs.
- Review the integration, purchase-price allocation and operating contribution of CashEdge and the other 2011 acquisitions.
- Monitor liquidity after the decline in cash, the $120 million revolving-credit borrowing, and approximately $3.5 billion of debt.
- Separate recurring operating performance from the $85 million debt-extinguishment charge, $18 million severance cost, acquisition-related amortization and integration expenses.
- Evaluate exposure to financial-institution consolidation, client losses or failures, regulatory changes, and transaction-volume trends.
- Confirm the timing and effect of the senior term loan maturity, hedge expirations in September 2012, and future interest expense from accumulated hedge losses.