Form 10-Q
Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 


 

FORM 10-Q

 


 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

 

For the quarterly period ended June 30, 2005

 

or

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

 

For the transition period from              to             

 

Commission file number 0-14948

 


 

FISERV, INC.

(Exact name of Registrant as specified in its charter)

 


 

WISCONSIN   39-1506125

(State or other jurisdiction of

incorporation or organization)

 

(I. R. S. Employer

Identification No.)

255 FISERV DRIVE, BROOKFIELD, WI   53045
(Address of principal executive office)   (Zip Code)

 

(262) 879-5000

(Registrant’s telephone number, including area code)

 


 

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

 

Indicate by checkmark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).    Yes  x    No  ¨

 

As of July 25, 2005, there were 188,118,160 shares of common stock, $.01 par value, of the Registrant outstanding.

 



Table of Contents

FISERV, INC. AND SUBSIDIARIES

 

INDEX

 

          Page

PART I - FINANCIAL INFORMATION     
     Item 1. Financial Statements     
          Condensed Consolidated Statements of Income    3
          Condensed Consolidated Balance Sheets    4
          Condensed Consolidated Statements of Cash Flows    5
          Notes to Condensed Consolidated Financial Statements    6
     Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations    8
     Item 3. Quantitative and Qualitative Disclosures About Market Risk    11
     Item 4. Controls and Procedures    11
PART II - OTHER INFORMATION     
     Item 1. Legal Proceedings    12
     Item 2. Unregistered Sales of Equity Securities and Use of Proceeds    12
     Item 6. Exhibits    12
     Signatures    12
     Exhibit Index    13

 

 


Table of Contents

PART I. FINANCIAL INFORMATION

ITEM I. FINANCIAL STATEMENTS

 

FISERV, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(In thousands, except per share amounts)

(Unaudited)

 

    

Three Months Ended

June 30,


   

Six Months Ended

June 30,


 
     2005

    2004

    2005

    2004

 

Revenues:

                                

Processing and services

   $ 913,095     $ 829,842     $ 1,795,414     $ 1,641,398  

Customer reimbursements

     83,331       89,931       174,126       187,252  
    


 


 


 


Total revenues

     996,426       919,773       1,969,540       1,828,650  
    


 


 


 


Cost of revenues:

                                

Salaries, commissions and payroll related costs

     348,693       324,569       692,177       654,155  

Customer reimbursement expenses

     83,331       89,931       174,126       187,252  

Data processing costs and equipment rentals

     54,054       53,584       105,432       105,689  

Prescription costs

     131,085       108,807       255,181       204,385  

Other operating expenses

     146,872       134,031       279,194       261,068  

Depreciation and amortization

     45,146       46,939       88,169       92,851  
    


 


 


 


Total cost of revenues

     809,181       757,861       1,594,279       1,505,400  
    


 


 


 


Operating income

     187,245       161,912       375,261       323,250  

Interest expense - net

     (1,280 )     (4,486 )     (4,942 )     (9,218 )

Realized gain from sale of investment

     —         —         43,452       —    
    


 


 


 


Income from continuing operations before income taxes

     185,965       157,426       413,771       314,032  

Income tax provision

     71,968       61,331       160,129       122,228  
    


 


 


 


Income from continuing operations

     113,997       96,095       253,642       191,804  

Loss from discontinued operations, net of tax

     —         (1,061 )     (619 )     (3,972 )
    


 


 


 


Net income

   $ 113,997     $ 95,034     $ 253,023     $ 187,832  
    


 


 


 


Basic net income (loss) per share:

                                

Continuing operations

   $ 0.60     $ 0.49     $ 1.32     $ 0.98  

Discontinued operations

     —         (0.01 )     —         (0.02 )
    


 


 


 


Total

   $ 0.60     $ 0.49     $ 1.32     $ 0.96  
    


 


 


 


Diluted net income (loss) per share:

                                

Continuing operations

   $ 0.59     $ 0.49     $ 1.31     $ 0.97  

Discontinued operations

     —         (0.01 )     —         (0.02 )
    


 


 


 


Total

   $ 0.59     $ 0.48     $ 1.30     $ 0.95  
    


 


 


 


Shares used in computing net income (loss) per share:

                                

Basic

     190,879       195,051       192,131       194,803  
    


 


 


 


Diluted

     193,227       197,379       194,361       197,221  
    


 


 


 


 

See notes to condensed consolidated financial statements.

 

 

3


Table of Contents

FISERV, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Dollars in thousands)

(Unaudited)

 

    

June 30,

2005


   

December 31,

2004


 

Assets

                

Cash and cash equivalents

   $ 566,579     $ 516,127  

Accounts receivable - net

     473,897       437,764  

Prepaid expenses and other assets

     102,231       100,810  

Investments

     2,151,974       1,984,536  

Property and equipment - net

     202,338       200,709  

Intangible assets - net

     543,300       532,539  

Goodwill - net

     1,915,900       1,859,347  

Assets of discontinued operations held for sale

     —         2,751,517  
    


 


Total

   $ 5,956,219     $ 8,383,349  
    


 


Liabilities and Shareholders’ Equity

                

Accounts payable

   $ 220,079     $ 202,616  

Short-term borrowings

     100,000       100,000  

Accrued expenses

     285,422       363,513  

Accrued income taxes

     50,607       44,955  

Deferred revenues

     221,684       226,080  

Customer funds held and retirement account deposits

     1,886,369       1,829,639  

Deferred income taxes

     136,517       134,330  

Long-term debt

     490,659       505,327  

Liabilities of discontinued operations held for sale

     —         2,412,467  
    


 


Total liabilities

     3,391,337       5,818,927  
    


 


Shareholders’ equity:

                

Preferred stock, no par value: 25,000,000 shares authorized; none issued

     —         —    

Common stock, $0.01 par value: 450,000,000 shares authorized; 197,455,044 and 195,940,360 shares issued

     1,975       1,959  

Additional paid-in capital

     719,470       679,573  

Accumulated other comprehensive (loss) income

     (2,623 )     26,695  

Accumulated earnings

     2,173,562       1,920,539  

Treasury stock, at cost, 8,162,700 and 1,691,500 shares

     (327,502 )     (64,344 )
    


 


Total shareholders’ equity

     2,564,882       2,564,422  
    


 


Total

   $ 5,956,219     $ 8,383,349  
    


 


 

See notes to condensed consolidated financial statements.

 

 

4


Table of Contents

FISERV, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in thousands)

(Unaudited)

 

    

Six Months Ended

June 30,


 
     2005

    2004

 

Cash flows from operating activities:

                

Net income

   $ 253,023     $ 187,832  

Adjustment for discontinued operations

     619       3,972  

Adjustments to reconcile net income to net cash provided by operating activities:

                

Realized gain from sale of investment

     (43,452 )     —    

Deferred income taxes

     11,210       36,997  

Depreciation and amortization

     88,169       92,851  

Changes in assets and liabilities, net of effects from acquisitions and dispositions of businesses:

                

Accounts receivable

     (24,720 )     843  

Prepaid expenses and other assets

     620       (8,394 )

Accounts payable and accrued expenses

     (24,873 )     (9,386 )

Deferred revenues

     (7,714 )     466  

Accrued income taxes

     (3,200 )     24,041  
    


 


Net cash provided by operating activities

     249,682       329,222  
    


 


Cash flows from investing activities:

                

Capital expenditures, including capitalization of software costs for external customers

     (69,640 )     (68,885 )

Payment for acquisitions of businesses, net of cash acquired

     (135,654 )     (40,918 )

Proceeds from sale of businesses, net of expenses paid

     303,944       —    

Cash distribution received from discontinued operations prior to sale

     68,000       —    

Investments

     (173,518 )     (281,571 )
    


 


Net cash used in investing activities

     (6,868 )     (391,374 )
    


 


Cash flows from financing activities:

                

Repayment of long-term debt - net

     (14,845 )     (210,571 )

Issuance of common stock

     28,911       20,508  

Purchases of treasury stock

     (263,158 )     —    

Customer funds held and retirement account deposits

     56,730       282,458  
    


 


Net cash (used in) provided by financing activities

     (192,362 )     92,395  
    


 


Change in cash and cash equivalents

     50,452       30,243  

Beginning balance

     516,127       162,668  
    


 


Ending balance

   $ 566,579     $ 192,911  
    


 


 

See notes to condensed consolidated financial statements.

 

 

5


Table of Contents

FISERV, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

1. Principles of Consolidation

 

The condensed consolidated financial statements for the three and six month periods ended June 30, 2005 and 2004 are unaudited. In the opinion of management, all adjustments necessary for a fair presentation of such condensed consolidated financial statements have been included. Such adjustments consisted only of normal recurring items. Interim results are not necessarily indicative of results for a full year. The financial statements and notes are presented as permitted by Form 10-Q, and do not contain certain information included in the annual consolidated financial statements and notes of Fiserv, Inc. and subsidiaries (the “Company”). It is recommended that these interim condensed consolidated financial statements be read in conjunction with the consolidated financial statements and the notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2004. Certain prior period amounts have been reclassified to conform to the current period presentation. See the Company’s results by business segment in Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

 

2. Recent Accounting Pronouncement

 

In December 2004, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 123 (revised 2004), “Share-Based Payment” (“SFAS 123R”), that requires companies to expense the value of employee stock purchase plans, stock option grants and similar awards. In April 2005, the Securities and Exchange Commission (“SEC”) announced the adoption of a new rule that amends the compliance dates for SFAS 123R. The new rule allows companies to implement SFAS 123R at the beginning of their next fiscal year, instead of the next reporting period, that begins after June 15, 2005. The new rule does not change the accounting required by SFAS 123R; it only changes the date for compliance with the standard. The Company will adopt SFAS 123R on January 1, 2006 and continues to evaluate the impact that the adoption of the final standard will have on the Company’s financial statements.

 

3. Discontinued Operations

 

On March 24, 2005, the Company completed the sale of its securities clearing businesses to Fidelity Global Brokerage Group, Inc. for $344.9 million paid in cash at closing, subject to certain post-closing adjustments. Prior to completion of the sale, the securities clearing businesses paid a $68.0 million cash distribution to the Company. The sales proceeds, net of related expenses, including taxes that became due upon the sale of the securities clearing businesses, approximated the Company’s carrying value of its investment. The stock purchase agreement also provides for a contingent payment of up to $15.0 million to be paid after the first anniversary of the closing date based on achievement of certain revenue targets. In addition, as part of the stock purchase agreement, the Company retained the liability associated with the SEC investigation of the mutual fund trading practices of the securities clearing businesses. In April 2005, Fiserv Securities, Inc. settled with the SEC on this matter for $15.0 million, which was fully accrued for in the Company’s 2004 financial statements.

 

The Company’s securities clearing businesses have been reported as discontinued operations for all periods presented and are excluded from reported revenue, cost of revenues and operating cash flows. Summarized financial information for discontinued operations included in the financial statements for the three and six month periods ended June 30, 2005 and 2004 was as follows:

 

    

Three months ended

June 30,


   

Six months ended

June 30,


 

(In thousands)

 

   2005

   2004

    2005

    2004

 

Processing and services revenues

   $ —      $ 26,075     $ 26,295     $ 54,505  

Cost of revenues

     —        27,707       26,713       60,615  
    

  


 


 


Operating loss before income taxes

     —        (1,632 )     (418 )     (6,110 )

Income tax benefit from operations

     —        571       162       2,138  

Loss on sale of businesses, net of income taxes of $48,670

     —        —         (363 )     —    
    

  


 


 


Loss from discontinued operations, net of tax

   $ —      $ (1,061 )   $ (619 )   $ (3,972 )
    

  


 


 


 

4. Long-Term Debt

 

The Company has a credit facility totaling $700.0 million, which is comprised of a $465.3 million five-year revolving credit facility due in 2009 and a $234.7 million 364-day revolving credit facility that is renewable annually through 2009. The Company must, among other requirements, maintain a minimum net worth of $1.9 billion as of June 30, 2005 and limit its total debt to no more than three and one-half times the Company’s earnings before interest, taxes, depreciation and amortization. The Company was in compliance with all debt covenants at June 30, 2005.

 

6


Table of Contents

5. Stock-Based Compensation

 

The Company has accounted for its stock-based compensation plans in accordance with the intrinsic value provisions of Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees.” Accordingly, the Company did not record compensation expense in the condensed consolidated financial statements for its stock-based compensation plans.

 

The following table illustrates the effect on net income and net income per share had compensation expense been recognized consistent with the fair value provisions of SFAS No. 123, “Accounting for Stock-Based Compensation” (“SFAS 123”). The fair value of each option issued prior to January 1, 2004 was estimated on the date of grant using a Black-Scholes option-pricing model. For options granted on or after January 1, 2004, the fair value of each option was estimated on the date of grant using a binomial option-pricing model. Stock options are typically granted in the first quarter of the year, generally vest 20% on the date of grant and 20% each year thereafter and expire 10 years from the date of the award. As a result, the expense that would be recognized under SFAS 123 during the first quarter is significantly higher than the expense for the remaining quarters. The calculated expense for the six month period ended June 30, 2005 was higher than the expense in the comparable period in 2004 as certain participants met accelerated vesting provisions stipulated in the stock option agreements related to age and years of service with the Company in the first quarter of 2005.

 

    

Three months ended

June 30,


   

Six months ended

June 30,


 

(In thousands, except per share data)

 

   2005

    2004

    2005

    2004

 

Net income:

                                

As reported

   $ 113,997     $ 95,034     $ 253,023     $ 187,832  

Less: stock compensation expense — net of tax

     (2,800 )     (4,200 )     (13,800 )     (9,700 )
    


 


 


 


Pro forma

   $ 111,197     $ 90,834     $ 239,223     $ 178,132  
    


 


 


 


Reported net income per share:

                                

Basic

   $ 0.60     $ 0.49     $ 1.32     $ 0.96  

Diluted

     0.59       0.48       1.30       0.95  

Pro forma net income per share:

                                

Basic

   $ 0.58     $ 0.47     $ 1.25     $ 0.91  

Diluted

     0.58       0.46       1.23       0.90  

 

6. Shares Used in Computing Net Income Per Share

 

The computation of the number of shares used in calculating basic and diluted net income per share is as follows:

 

    

Three months ended

June 30,


  

Six months ended

June 30,


(In thousands)

 

   2005

   2004

   2005

   2004

Weighted-average shares outstanding used for calculation of net income per share-basic

   190,879    195,051    192,131    194,803

Common stock equivalents

   2,348    2,328    2,230    2,418
    
  
  
  

Total shares used for calculation of net income per share-diluted

   193,227    197,379    194,361    197,221
    
  
  
  

Weighted-average shares under stock options excluded from the calculation of common stock equivalents as the impact was anti-dilutive

   28    4,263    1,252    2,169
    
  
  
  

 

7. Comprehensive Income

 

Comprehensive income consists of net income, unrealized gains and losses on available-for-sale investment securities, foreign currency translation and fair market value adjustments on cash flow hedges and is as follows:

 

    

Three months ended

June 30,


   

Six months ended

June 30,


(In thousands)

 

   2005

   2004

    2005

    2004

Net income

   $ 113,997    $ 95,034     $ 253,023     $ 187,832

Components of comprehensive income - net

     154      (181 )     (29,318 )     2,801
    

  


 


 

Comprehensive income

   $ 114,151    $ 94,853     $ 223,705     $ 190,633
    

  


 


 

 

The components of comprehensive income for the six month period ended June 30, 2005 was negatively impacted by the realized gain on the sale of the Company’s remaining ownership of 3.2 million shares of Bisys Group, Inc. common stock that was recorded in the first quarter of 2005.

 

8. Subsequent Event

 

On July 27, 2005, the Company signed a definitive agreement to acquire BillMatrix Corp. for a total purchase price of approximately $350 million. The transaction is expected to close in the third quarter of 2005.

 

 

7


Table of Contents

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Results of Operations

 

The Company is an independent provider of financial data processing systems and related information management services and products to financial institutions, other financial intermediaries and employers who self-insure their health plans. The Company’s continuing operations are classified into three business segments: Financial institution outsourcing, systems and services (“Financial”); Health plan management services (“Health”); and Investment support services (“Investment”).

 

The following tables and discussion exclude the revenues and expenses associated with customer reimbursements because management believes that it is not appropriate to include customer reimbursements in analyzing the current performance of the Company as these balances offset in revenues and expenses with no impact on operating income and these amounts are not an indicator of current or future business trends. Customer reimbursements, which primarily consist of pass-through expenses such as postage and data communication costs, were $83.3 million and $89.9 million for the three month periods ended June 30, 2005 and 2004 and $174.1 million and $187.3 million for the six month periods ended June 30, 2005 and 2004, respectively. The following tables present, for the periods indicated, certain amounts included in the Company’s condensed consolidated statements of income, the relative percentage that those amounts represent to processing and services revenues, and the change in those amounts from period to period.

 

     Three months ended June 30,

 
     (In millions)

   Percentage of revenues

    Increase (Decrease)

 
     2005

   2004

   2005

    2004

    In millions

    Percentage

 

Processing and services revenues by segment:

                                        

Financial

   $ 632.1    $ 580.2    69 %   70 %   $ 51.9     9 %

Health

     246.3      218.3    27 %   26 %     28.0     13 %

Investment

     34.7      31.4    4 %   4 %     3.3     10 %
    

  

  

 

 


 

Total

   $ 913.1    $ 829.8    100 %   100 %   $ 83.3     10 %
    

  

  

 

 


 

Cost of revenues:

                                        

Salaries, commissions and payroll related costs

   $ 348.7    $ 324.6    38 %   39 %   $ 24.1     7 %

Data processing costs and equipment rentals

     54.1      53.6    6 %   6 %     0.5     1 %

Prescription costs

     131.1      108.8    14 %   13 %     22.3     20 %

Other operating expenses

     146.9      134.0    16 %   16 %     12.8     10 %

Depreciation and amortization

     45.1      46.9    5 %   6 %     (1.8 )   (4) %
    

  

  

 

 


 

Total

   $ 725.9    $ 667.9    79 %   80 %   $ 57.9     9 %
    

  

  

 

 


 

Operating income by segment: (1)

                                        

Financial

   $ 160.2    $ 138.9    25 %   24 %   $ 21.3     15 %

Health

     18.9      18.0    8 %   8 %     0.9     5 %

Investment

     8.2      5.0    24 %   16 %     3.2     63 %
    

  

  

 

 


 

Total

   $ 187.2    $ 161.9    21 %   20 %   $ 25.3     16 %
    

  

  

 

 


 

     Six months ended June 30,

 
     (In millions)

   Percentage of revenues

    Increase (Decrease)

 
     2005

   2004

   2005

    2004

    In millions

    Percentage

 

Processing and services revenues by segment:

                                        

Financial

   $ 1,240.6    $ 1,154.7    69 %   70 %   $ 85.9     7 %

Health

     487.4      424.9    27 %   26 %     62.5     15 %

Investment

     67.5      61.9    4 %   4 %     5.6     9 %
    

  

  

 

 


 

Total

   $ 1,795.4    $ 1,641.4    100 %   100 %   $ 154.0     9 %
    

  

  

 

 


 

Cost of revenues:

                                        

Salaries, commissions and payroll related costs

   $ 692.2    $ 654.2    39 %   40 %   $ 38.0     6 %

Data processing costs and equipment rentals

     105.4      105.7    6 %   6 %     (0.3 )   —    

Prescription costs

     255.2      204.4    14 %   12 %     50.8     25 %

Other operating expenses

     279.2      261.1    16 %   16 %     18.1     7 %

Depreciation and amortization

     88.2      92.9    5 %   6 %     (4.7 )   (5 )%
    

  

  

 

 


 

Total

   $ 1,420.2    $ 1,318.1    79 %   80 %   $ 102.0     8 %
    

  

  

 

 


 

Operating income by segment: (1)

                                        

Financial

   $ 320.3    $ 277.5    26 %   24 %   $ 42.9     15 %

Health

     41.1      36.6    8 %   9 %     4.5     12 %

Investment

     13.8      9.2    20 %   15 %     4.7     51 %
    

  

  

 

 


 

Total

   $ 375.3    $ 323.3    21 %   20 %   $ 52.0     16 %
    

  

  

 

 


 


(1) Operating margin by segment is calculated as a percentage of each segment’s processing and services revenues.

 

 

8


Table of Contents

Internal Revenue Growth

 

Internal revenue growth percentages are measured as the increase in total processing and services revenues for the current period less “acquired revenue from acquisitions” divided by total processing and services revenues from the prior year period plus “acquired revenue from acquisitions.” “Acquired revenue from acquisitions” represents pre-acquisition normalized revenue of acquired companies, less dispositions, for the comparable prior year period. Internal revenue growth percentage is a non-GAAP financial measure that the Company believes is useful to investors because it provides a breakdown of internal and acquisition-related revenue growth. The following tables set forth the calculation of internal revenue growth for the three and six month periods ended June 30, 2005:

 

     Three months ended June 30,

 
     (In millions)

   

2005

Internal

Growth %


   

2004

Internal

Growth %


 
     2005

   2004

   Increase
(Decrease)


     

Total Company

                                  

Processing and services revenues

   $ 913.1    $ 829.8    $ 83.3              

Acquired revenue from acquisitions

            13.8      (13.8 )            
    

  

  


 

 

Adjusted revenues

   $ 913.1    $ 843.6    $ 69.5     8 %   11 %
    

  

  


 

 

By Segment:

                                  

Financial

                                  

Processing and services revenues

   $ 632.1    $ 580.2    $ 51.9              

Acquired revenue from acquisitions

            8.1      (8.1 )            
    

  

  


 

 

Adjusted revenues

   $ 632.1    $ 588.2    $ 43.8     7 %   1 %
    

  

  


 

 

Health

                                  

Processing and services revenues

   $ 246.3    $ 218.3    $ 28.0              

Acquired revenue from acquisitions

            5.7      (5.7 )            
    

  

  


 

 

Adjusted revenues

   $ 246.3    $ 223.9    $ 22.3     10 %   50 %
    

  

  


 

 

Investment

                                  
    

  

  


 

 

Processing and services revenues

   $ 34.7    $ 31.4    $ 3.3     10 %   12 %
    

  

  


 

 

     Six months ended June 30,

 
     (In millions)

   

2005

Internal

Growth %


   

2004

Internal
Growth %


 
     2005

   2004

   Increase
(Decrease)


     

Total Company

                                  

Processing and services revenues

   $ 1,795.4    $ 1,641.4    $ 154.0              

Acquired revenue from acquisitions

            23.9      (23.9 )            
    

  

  


 

 

Adjusted revenues

   $ 1,795.4    $ 1,665.3    $ 130.1     8 %   10 %
    

  

  


 

 

By Segment:

                                  

Financial

                                  

Processing and services revenues

   $ 1,240.6    $ 1,154.7    $ 85.9              

Acquired revenue from acquisitions

            13.0      (13.0 )            
    

  

  


 

 

Adjusted revenues

   $ 1,240.6    $ 1,167.7    $ 72.9     6 %   2 %
    

  

  


 

 

Health

                                  

Processing and services revenues

   $ 487.4    $ 424.9    $ 62.5              

Acquired revenue from acquisitions

            10.9      (10.9 )            
    

  

  


 

 

Adjusted revenues

   $ 487.4    $ 435.8    $ 51.6     12 %   46 %
    

  

  


 

 

Investment

                                  
    

  

  


 

 

Processing and services revenues

   $ 67.5    $ 61.9    $ 5.6     9 %   5 %
    

  

  


 

 

 

Processing and Services Revenues

 

Total processing and services revenues increased $83.3 million, or 10%, in the second quarter of 2005 compared to 2004 and $154.0 million, or 9%, in the first six months of 2005 compared to 2004. Internal revenue growth for the second quarter of 2005 was 8% compared to 11% in 2004 and for the first six months of 2005 was 8% compared to 10% in 2004. The decrease in the Company’s overall internal revenue growth rate in 2005 compared to 2004 was primarily due to lower revenue growth in the Health segment, offset by increased internal revenue growth in the Financial segment. Overall internal revenue growth in 2005 was primarily derived from sales to new clients, cross-sales to existing clients and increases in transaction volumes from existing clients.

 

The Financial segment had revenue growth of $51.9 million, or 9%, in the second quarter of 2005 compared to 2004 and $85.9 million, or 7%, in the first six months of 2005 compared to 2004 primarily driven by increases in internal revenue growth. The internal revenue growth rate in this segment for the second quarter was 7% in 2005 compared to 1% in 2004 and for the first six months was 6% in 2005 and 2% in 2004. The largest contributors to the increased 2005 internal revenue growth rate in this segment were increased volumes in the Company’s lending division’s loan settlement services businesses, incremental revenue associated with the newly signed Australian check processing business that began operations in mid-April, continued strong software license revenues, and higher than normal revenues associated with one-time flood insurance claims processing.

 

Financial segment revenues, primarily in 2006, will be negatively impacted by approximately $40 million due to changes affecting three client relationships. One client is in the process of being acquired, another client transitioned from an outsourced solution to license Fiserv software, and a third client plans to convert from an outsourced solution to an in-house solution.

 

9


Table of Contents

The Financial segment revenues included early contract termination fees from clients that were acquired by other financial institutions of $7.1 million for the second quarter of 2005 compared to $5.1 million for the second quarter of 2004. For the first six months of 2005, the Financial segment revenues included early contract termination fees of $22.0 million compared to $19.4 million for the first six months of 2004. This segment’s businesses generally enter into three to five-year contracts with their clients that contain early contract termination fees. These fees are very unpredictable and can vary significantly from period to period based on the number of terminated contracts and how early in the contract term a contract is terminated.

 

The Health segment had revenue growth of $28.0 million, or 13%, in the second quarter of 2005 compared to 2004 and $62.5 million, or 15%, in the first six months of 2005 compared to 2004. The internal revenue growth rate in this segment for the second quarter of 2005 was 10% (6% due to the inclusion in revenues and cost of revenues of prescription ingredient costs) compared to 50% in 2004 (36% due to the inclusion in revenues and cost of revenues of prescription ingredient costs) and for the first six months of 2005 was 12% (8% due to the inclusion in revenues and cost of revenues of prescription ingredient costs) compared to 46% (34% due to the inclusion in revenues and cost of revenues of prescription ingredient costs). The decrease in the second quarter and year to date 2005 internal revenue growth rates compared to 2004 was primarily due to significant growth of the Company’s pharmacy services businesses in early 2004 based on the signing of some very large clients. In addition, growth of the health plan administration businesses in 2005 has been negatively impacted by increased competition in the large commercial employer market.

 

The Investment segment had internal revenue growth of $3.3 million, or 10%, in the second quarter of 2005 compared to 2004 and $5.6 million, or 9%, in the first six months of 2005 compared to 2004.

 

Cost of Revenues

 

Total cost of revenues increased $57.9 million, or 9%, in the second quarter of 2005 compared to 2004 and $102.0 million, or 8%, in the first six months of 2005 compared to 2004. As a percentage of processing and services revenues, cost of revenues were 79% for the three and six month periods ended June 30, 2005 compared to 80% in the three and six month periods ended June 30, 2004. The make-up of expense categories included in cost of revenues in 2005 as a percentage of processing and services revenues was relatively consistent with the prior year. For the six months ended June 30, 2005, prescription costs as a percentage of revenues increased to 14% compared to 12% in the prior year period due to growth in the pharmacy services businesses in the Health segment. The pharmacy services businesses have a very high proportion of total costs related to the prescription cost which increased by $50.8 million in the first six months of 2005 from 2004 as a result of increased revenues.

 

Operating Income

 

Operating income increased $25.3 million, or 16%, in the second quarter of 2005 compared to 2004 and $52.0 million, or 16%, in the first six months of 2005 compared to 2004. The operating income increases were primarily derived from the Financial segment. Operating margins in the Financial segment were 25% in the second quarter of 2005 and 26% for the first six months of 2005. The increase in operating margins in 2005 compared to the prior year periods was primarily driven by increased software license revenues and higher than normal flood insurance claims processing revenue (both of which generate higher incremental margins) along with continued cost synergies from previously completed product consolidations.

 

The Health segment’s operating margin was 8% in the second quarter of 2005 and 2004 and 8% in the first six months of 2005 compared to 9% in 2004.

 

The Investment segment’s operating margin was 24% in the second quarter of 2005 compared to 16% in 2004 and 20% in the first six months of 2005 compared to 15% in 2004. The increase in operating margin in the second quarter of 2005 compared to the prior periods was primarily due to a temporary increase in cash investment balances that improved net investment income and continued client growth, especially in the custody and trading services for registered investment advisors.

 

Discontinued Operations

 

On March 24, 2005, the Company completed the sale of its securities clearing businesses to Fidelity Global Brokerage Group, Inc. for $344.9 million paid in cash at closing, subject to certain post-closing adjustments. Prior to completion of the sale, the securities clearing businesses paid a $68.0 million cash distribution to the Company. The sales proceeds, net of related expenses, including taxes that became due upon the sale of the securities clearing businesses, approximated the Company’s carrying value of its investment. In the first quarter of 2005, the Company recorded a net loss on the sale of discontinued operations of $0.4 million, net of related income taxes of $48.7 million. The higher income tax expense on the sale of the securities clearing operations was primarily due to a significantly lower tax basis than book basis in the discontinued operations due primarily to a tax free exchange in the Company’s initial purchase of one of the companies included in discontinued operations. The stock purchase agreement also provides for a contingent payment of up to $15.0 million to be paid after the first anniversary of the closing date based on achievement of certain revenue targets. In addition, as part of the stock purchase agreement, the Company retained the liability associated with the Securities and Exchange Commission’s (“SEC”) investigation of the mutual fund trading practices of the securities clearing businesses. In April 2005, Fiserv Securities, Inc. settled with the SEC on this matter for $15.0 million which was fully accrued for in the Company’s 2004 financial statements.

 

Interest expense-net

 

During the first six months of 2005, net interest expense was $4.9 million compared to $9.2 million for the same period in 2004. The decrease in net interest expense was due to interest income earned on increased cash balances which primarily resulted from the proceeds received on the sale of the securities clearing businesses.

 

Realized Gain from Sale of Investment

 

During the first six months of 2005, the Company recorded a one-time realized gain of $43.5 million, or $0.14 per share, from the sale of its remaining ownership of 3.2 million shares of Bisys Group, Inc. common stock.

 

Income Tax Provision

 

The year to date effective income tax rate on continuing operations was 38.7% in 2005 and 38.9% in 2004.

 

Net Income Per Share - Diluted

 

Net income per share-diluted for the second quarter was $0.59 in 2005 compared to $0.48 in 2004. Net income per share-diluted for the first six months of 2005 was $1.30 compared to $0.95 in the comparable 2004 period. The $1.30 in net income per share for the first six months of 2005 was positively impacted by $0.14 per share due to a one-time realized gain on the sale of the 3.2 million shares of Bisys Group, Inc. common stock.

 

10


Table of Contents

Liquidity and Capital Resources

 

Free cash flow is measured as net cash provided by operating activities less capital expenditures including capitalization of software costs for external customers, as reported in the Company’s condensed consolidated statements of cash flows. Free cash flow is a non-GAAP financial measure that the Company believes is useful to investors because it provides another measure of available cash flow after the Company has satisfied the capital requirements of its operations. The following table summarizes free cash flow for the Company:

 

    

Six months ended

June 30,


 

(In millions)

 

   2005

    2004

 

Net cash provided by operating activities

   $ 249.7     $ 329.2  

Capital expenditures, including capitalization of software costs for external customers

     (69.6 )     (68.9 )
    


 


Free cash flow

   $ 180.0     $ 260.3  
    


 


 

Free cash flow in the first six months of 2005 was $180.0 million, decreasing $80.3 million over the prior year period. A majority of the decline in free cash flow was due to changes in accrued and deferred income taxes of $53.0 million compared to 2004 resulting primarily from higher required estimated tax payments in the first six months of 2005 compared to 2004. In addition, free cash flow was also negatively impacted by an increase in accounts receivable of $24.7 million in 2005, or 6%, primarily due to increased internal revenue growth in the Financial segment and the timing of accounts receivable collections. Gross software development costs for external customers capitalized in the first six months of 2005 were $22.7 million, offset by associated amortization of $25.5 million.

 

In the first quarter of 2005, the Company received a $68.0 million cash distribution from the discontinued securities clearing businesses prior to the sale and received $344.9 million in proceeds from the sale of the Company’s securities clearing businesses. During the quarter ended June 30, 2005, the Company paid additional expenses related to the sale of its securities clearing businesses for income taxes and the settlement of the SEC’s investigation of the mutual fund trading practices of the securities clearing businesses.

 

During the six months ended June 30, 2005, the Company made payments of $135.7 million related to the acquisition of businesses and contingent payments on previous acquisitions. In addition, the Company repurchased $263.2 million of common stock during the six months ended June 30, 2005 and has 1.8 million shares available for repurchase as of June 30, 2005. In July 2005, the Company’s Board of Directors authorized the repurchase of an additional 10 million shares of the Company’s common stock.

 

The Company has a credit facility totaling $700.0 million, which is comprised of a $465.3 million five-year revolving credit facility due in 2009 and a $234.7 million 364-day revolving credit facility which is renewable annually through 2009. Long-term debt includes $190.2 million borrowed under the credit facility at June 30, 2005. The Company must, among other requirements, maintain a minimum net worth of $1.9 billion as of June 30, 2005 and limit its total debt to no more than three and one-half times the Company’s earnings before interest, taxes, depreciation and amortization. At June 30, 2005, the Company had $490.7 million of long-term debt, while shareholders’ equity was $2.6 billion. The Company was in compliance with all covenants as of June 30, 2005.

 

The Company believes that its cash flow from operations together with its existing cash balances will be adequate to meet its operating requirements. In the event the Company makes significant future acquisitions, however, it may raise funds through additional borrowings or the issuance of securities.

 

Safe Harbor Statement Under the Private Securities Litigation Reform Act of 1995

 

Certain matters discussed herein are “forward-looking statements” intended to qualify for the safe harbor from liability established by the Private Securities Litigation Reform Act of 1995. These forward-looking statements can generally be identified as such because the context of the statement will include words such as “believes,” “anticipates,” or “expects,” or words of similar import. Similarly, statements that describe future plans, objectives or goals of the Company are also forward-looking statements. Such forward-looking statements are subject to certain risks and uncertainties, which could cause actual results to differ materially from those currently anticipated. Factors that could affect results include, among others, economic, competitive, governmental, regulatory and technological factors affecting the Company’s operations, markets, services and related products, prices and other factors discussed in the Company’s prior filings with the Securities and Exchange Commission. Shareholders, potential investors and other readers are urged to consider these factors carefully in evaluating the forward-looking statements and are cautioned not to place undue reliance on such forward-looking statements. The Company assumes no obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise.

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

The Company’s quantitative and qualitative disclosures about market risk are incorporated by reference to Item 7A of the Company’s Annual Report on Form 10-K for the year ended December 31, 2004 and have not materially changed since that report was filed.

 

ITEM 4. CONTROLS AND PROCEDURES

 

Evaluation of disclosure controls and procedures.

 

As required by Rule 13a-15(b) under the Securities Exchange Act of 1934 (the “Exchange Act”), management, with the participation of the Company’s chief executive officer and chief financial officer, evaluated the design and operation of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act). Based on this evaluation, the Company’s chief executive officer and chief financial officer concluded that the Company’s disclosure controls and procedures were effective as of June 30, 2005.

 

Changes in internal controls over financial reporting.

 

There was no change in the Company’s internal control over financial reporting that occurred during the quarter ended June 30, 2005 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

11


Table of Contents

PART II. OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

 

In April 2005, without admitting or denying the findings of the Securities and Exchange Commission (“SEC”), Fiserv Securities, Inc. (“FSI”) consented to an SEC order censuring FSI, requiring it to pay disgorgement in the amount of $5 million and a civil penalty in the amount of $10 million and requiring FSI to comply with certain undertakings. The aggregate $15 million was paid to the SEC in April 2005 and was fully accrued for in the Company’s 2004 financial statements. The Company sold FSI in March 2005.

 

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

The table below sets forth information with respect to purchases made by or on behalf of the Company or any “affiliated purchaser” (as defined in Rule 10b-18(a)(3) under the Securities Exchange Act of 1934) of shares of Company common stock during the three months ended June 30, 2005:

 

Period


  

Total

Number of

Shares

Purchased


  

Average

Price Paid

per Share


  

Total Number of

Shares

Purchased as

Part of Publicly

Announced

Plans or

Programs (1)


  

Maximum

Number of Shares

that May Yet

Be Purchased

Under the Plans or

Programs (1)(2)


April 1 - 30, 2005

   1,235,300    $ 40.56    1,235,300    4,279,930

May 1 - 31, 2005

   741,600    $ 42.91    741,600    3,538,330

June 1 - 30, 2005

   1,725,000    $ 43.22    1,725,000    1,813,330
    
         
    

Total

   3,701,900    $ 42.27    3,701,900     
    
         
    

(1) In 2004, the Company’s Board of Directors authorized the repurchase of 8.3 million shares of the Company’s common stock. As of June 30, 2005, 1,813,330 shares remained authorized for purchase under that program. The repurchase authorization does not expire.
(2) In July 2005, the Company’s Board of Directors authorized the repurchase of an additional 10 million shares of the Company’s common stock. The repurchase authorization does not expire.

 

ITEM 6. EXHIBITS

 

The exhibits listed in the accompanying exhibit index are filed as part of this Quarterly Report on Form 10-Q.

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

           

Fiserv, Inc.

(Registrant)

Date:   July 29, 2005   By:  

/s/ Kenneth R. Jensen


            KENNETH R. JENSEN
            Senior Executive Vice President, Chief
            Financial Officer, Treasurer and Assistant
            Secretary

 

12


Table of Contents

EXHIBIT INDEX

 

Exhibit
Number


  

Exhibit Description


31.1    Certification of the Chief Executive Officer, dated July 29, 2005
31.2    Certification of the Chief Financial Officer, dated July 29, 2005
32    Certification of the Chief Executive Officer and Chief Financial Officer, dated July 29, 2005

 

 

13

Section 302 CEO Certification

EXHIBIT 31.1

 

CERTIFICATIONS

 

I, Leslie M. Muma, certify that:

 

1. I have reviewed this quarterly report on Form 10-Q of Fiserv, Inc.;

 

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

 

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

 

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

 

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

 

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

Date:   July 29, 2005   By:  

/s/ Leslie M. Muma


            LESLIE M. MUMA
            President and Chief Executive Officer

 

 

Section 302 CFO Certification

EXHIBIT 31.2

 

CERTIFICATIONS

 

I, Kenneth R. Jensen, certify that:

 

1. I have reviewed this quarterly report on Form 10-Q of Fiserv, Inc.;

 

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

 

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

 

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

 

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

 

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

Date:   July 29, 2005   By:  

/s/ Kenneth R. Jensen


            KENNETH R. JENSEN
            Senior Executive Vice President, Chief
            Financial Officer, Treasurer and Assistant
            Secretary

 

 

Section 906 CEO and CFO Certification

EXHIBIT 32

 

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

 

In connection with the Quarterly Report on Form 10-Q of Fiserv, Inc. (the “Company”) for the quarter ended June 30, 2005 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), Leslie M. Muma, as President and Chief Executive Officer of the Company, and Kenneth R. Jensen, as Senior Executive Vice President, Chief Financial Officer, Treasurer and Assistant Secretary of the Company, each hereby certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that to the best of his knowledge:

 

  (1) The Report fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934; and

 

  (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

 

By:  

/s/ Leslie M. Muma


    LESLIE M. MUMA
    July 29, 2005
   

/s/ Kenneth R. Jensen


    KENNETH R. JENSEN
    July 29, 2005