FISERV INC quarterly report, Q2 FY2020

Business Context and Reporting Period

Fiserv, Inc. filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2020. The company provides payments, merchant acquiring, card and issuer processing, digital banking, account processing, e-commerce, and Clover point-of-sale solutions through its Acceptance, Fintech, and Payments segments.

Results include First Data Corporation from its July 29, 2019 acquisition and are therefore not directly comparable with the pre-acquisition 2019 reported results. Prior-period segment information was restated for the 2020 segment realignment.

Key Financial Metrics

Metric	Three months ended June 30, 2020	Three months ended June 30, 2019	Six months ended June 30, 2020	Six months ended June 30, 2019
Total revenue	$3.465 billion	$1.512 billion	$7.234 billion	$3.014 billion
Operating income	$165 million	$384 million	$794 million	$757 million
Operating margin	4.7%	25.4%	11.0%	25.1%
Net income attributable to Fiserv	$2 million	$223 million	$394 million	$448 million
Diluted earnings per share	$0.00	$0.56	$0.57	$1.12
Net cash provided by operating activities	Not separately provided	Not separately provided	$1.919 billion	$579 million

Revenue increased 129% in the second quarter and 140% for the six-month period, primarily due to the First Data acquisition. Reported profitability was pressured by acquired intangible amortization, integration costs, higher interest expense, and COVID-19-related transaction-volume declines.

Second-quarter interest expense, net was $174 million, compared with $58 million in the prior-year quarter. Six-month interest expense, net was $361 million, compared with $115 million.
Six-month depreciation and amortization was $1.673 billion, including $1.099 billion of acquisition-related intangible amortization.
Second-quarter merchant credit losses were $24 million; six-month losses were $54 million. Merchant credit-loss reserves were $46 million at June 30, 2020, compared with $34 million at December 31, 2019.
Capital expenditures were $488 million for the first six months, compared with $210 million in the prior-year period, or approximately 7% of revenue in both periods.

Liquidity, Debt, and Capital Allocation

Cash and cash equivalents were $869 million at June 30, 2020, compared with $893 million at December 31, 2019. Approximately $347 million was classified as unavailable, leaving $522 million identified as available cash.
Total debt, including current maturities, was approximately $21.9 billion at June 30, 2020, consisting of $359 million of current maturities and $21.515 billion of long-term debt.
The company had $960 million outstanding under its revolving credit facility, which has $3.5 billion of total capacity and matures in September 2023. Management reported approximately $2.5 billion of available revolving capacity.
On May 13, 2020, Fiserv issued $2.0 billion of senior notes: $1.0 billion at 2.25% due 2027 and $1.0 billion at 2.65% due 2030. Proceeds were used to repay $850 million of notes due in 2020 and $1.1 billion of revolving borrowings.
The company was in compliance with its financial debt covenants and stated that it expected to remain compliant. Its credit ratings were Baa2 with a stable outlook from Moody’s and BBB with a stable outlook from S&P.
Fiserv repurchased $1.4 billion of common stock during the first six months, with approximately 7.5 million shares remaining under its authorization at June 30, 2020. The company stated that its current policy is to prioritize operating cash flow for capital expenditures, share repurchases, acquisitions, and debt repayment rather than dividends.

Material Changes Versus the Prior Comparable Period

The First Data acquisition added $2.021 billion of second-quarter revenue and $4.296 billion of six-month revenue. It also added substantial amortization, integration expenses, debt, and interest costs.
Second-quarter operating income fell 57% to $165 million, and operating margin declined 2,070 basis points to 4.7%. Six-month operating income increased 5% to $794 million, but operating margin declined 1,410 basis points to 11.0%.
Acceptance revenue was $1.223 billion in the quarter and $2.624 billion for six months, entirely reflecting First Data in the presented comparison. Fintech revenue declined 2% in both periods, while Payments revenue increased 99% in the quarter and 106% for six months.
Corporate and Other recorded an operating loss of $880 million in the quarter and $1.337 billion for six months, largely due to acquisition-related intangible amortization, integration costs, and other First Data-related corporate expenses.
Fiserv sold a 60% controlling interest in its Investment Services business on February 18, 2020, receiving $584 million of pre-tax proceeds and recording a $428 million pre-tax gain. The remaining 40% interest is accounted for under the equity method.
Fiserv acquired MerchantPro Express, Bypass Mobile, and Inlet for aggregate consideration of $161 million, including estimated earn-outs. Preliminary allocations included approximately $119 million of goodwill.
The company adopted the current expected credit loss standard on January 1, 2020, resulting in a $45 million decrease to beginning retained earnings.

Outlook, Commentary, Risks, and Unusual Items

Management did not provide a clear quantitative earnings or revenue outlook in the filing. It stated that merchant acquiring and payment volumes declined significantly during the latter part of March and throughout the second quarter because of COVID-19, but began recovering in May and continued improving in June and July. Future results remained difficult to predict.

COVID-19 could continue to reduce consumer spending, merchant transaction volumes, payment activity, technology-project demand, and client collections.
Risks include merchant defaults and chargebacks, increased payment fraud and cybersecurity threats, supply-chain and workforce disruption, service-level failures, regulatory changes, litigation, and pressure on liquidity or debt covenants.
Management recorded $140 million of restructuring charges and $77 million of employee termination costs during the first six months related primarily to First Data integration. Additional integration costs are expected, but the amount could not be estimated because plans were not finalized.
The company recorded a $40 million non-cash impairment charge for facilities exited during the quarter and accelerated amortization related to terminated vendor and financing contracts.
Management identified potential goodwill impairment as a risk if economic conditions deteriorate, although no goodwill impairment had been recorded through June 30, 2020.
Legal reserves were $30 million at June 30, 2020, with estimated potential exposure in excess of recorded reserves ranging from $0 to $60 million. A $40 million Federal Trade Commission matter was resolved during the quarter using a previously recorded accrual.
The company stated that it had adequate capital resources and access to financing for current and reasonably anticipated needs, but acknowledged that a prolonged pandemic or economic deterioration could impair cash flow, financing access, and debt-service capacity.

Investor Verification Points

Separate the underlying performance of First Data from acquisition-related amortization, restructuring, integration costs, and financing effects.
Verify the trajectory of merchant acquiring and payment volumes after the June quarter and assess sensitivity to additional COVID-19 waves or weaker consumer spending.
Monitor leverage, refinancing requirements, covenant headroom, variable-rate debt exposure, and the availability of the revolving credit facility.
Assess whether the $1.919 billion of operating cash flow is sustainable after adjusting for non-cash amortization, working-capital timing, and transaction-related items.
Track merchant credit losses, chargebacks, receivable collections, and collateral levels as indicators of payment-processing risk.
Evaluate the pace and total cost of First Data integration, including additional restructuring, facility exits, employee termination costs, and potential goodwill impairment.
Confirm the financial and strategic impact of the Investment Services divestiture and the July 1, 2020 dissolution of the Banc of America Merchant Services joint venture.