EXHIBIT 13
2004 ANNUAL REPORT
FISERV, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
Years ended December 31,
2004 |
2003 |
2002 |
||||||||||
REVENUES: |
||||||||||||
Processing and services |
$ | 3,350,595 | $ | 2,592,115 | $ | 2,099,038 | ||||||
Customer reimbursements |
379,151 | 333,252 | 290,354 | |||||||||
TOTAL REVENUES |
3,729,746 | 2,925,367 | 2,389,392 | |||||||||
COST OF REVENUES: |
||||||||||||
Salaries, commissions and payroll related costs |
1,320,760 | 1,222,675 | 1,053,923 | |||||||||
Customer reimbursement expenses |
379,151 | 333,252 | 290,354 | |||||||||
Data processing costs and equipment rentals |
212,052 | 205,617 | 153,202 | |||||||||
Prescription costs |
439,576 | 55,902 | | |||||||||
Other operating expenses |
533,284 | 420,261 | 323,223 | |||||||||
Depreciation and amortization |
185,363 | 165,838 | 134,389 | |||||||||
TOTAL COST OF REVENUES |
3,070,186 | 2,403,545 | 1,955,091 | |||||||||
OPERATING INCOME |
659,560 | 521,822 | 434,301 | |||||||||
Interest expense |
(24,902 | ) | (22,895 | ) | (17,758 | ) | ||||||
Interest income |
6,708 | 7,340 | 8,589 | |||||||||
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES |
641,366 | 506,267 | 425,132 | |||||||||
Income tax provision |
246,468 | 197,444 | 165,801 | |||||||||
INCOME FROM CONTINUING OPERATIONS |
394,898 | 308,823 | 259,331 | |||||||||
INCOME (LOSS) FROM DISCONTINUED OPERATIONS, NET OF INCOME TAXES |
(17,256 | ) | 6,189 | 6,806 | ||||||||
NET INCOME |
$ | 377,642 | $ | 315,012 | $ | 266,137 | ||||||
BASIC NET INCOME (LOSS) PER SHARE: |
||||||||||||
Continuing operations |
$ | 2.03 | $ | 1.60 | $ | 1.36 | ||||||
Discontinued operations |
(0.09 | ) | 0.03 | 0.04 | ||||||||
Total |
$ | 1.94 | $ | 1.63 | $ | 1.39 | ||||||
DILUTED NET INCOME (LOSS) PER SHARE: |
||||||||||||
Continuing operations |
$ | 2.00 | $ | 1.58 | $ | 1.33 | ||||||
Discontinued operations |
(0.09 | ) | 0.03 | 0.03 | ||||||||
Total |
$ | 1.91 | $ | 1.61 | $ | 1.37 | ||||||
SHARES USED IN COMPUTING NET INCOME (LOSS) PER SHARE: |
||||||||||||
Basic |
194,981 | 193,240 | 191,386 | |||||||||
Diluted |
197,287 | 195,937 | 194,951 | |||||||||
See notes to consolidated financial statements.
2
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
December 31,
2004 |
2003 | ||||||
ASSETS |
|||||||
Cash and cash equivalents |
$ | 516,127 | $ | 162,668 | |||
Accounts receivable, less allowance for doubtful accounts |
437,764 | 417,521 | |||||
Prepaid expenses and other assets |
100,810 | 98,415 | |||||
Investments |
1,984,536 | 1,838,925 | |||||
Property and equipment |
213,799 | 200,579 | |||||
Intangible assets |
519,449 | 548,912 | |||||
Goodwill |
1,859,347 | 1,721,322 | |||||
Assets of discontinued operations held for sale |
2,751,517 | 2,225,833 | |||||
TOTAL |
$ | 8,383,349 | $ | 7,214,175 | |||
LIABILITIES AND SHAREHOLDERS EQUITY |
|||||||
Accounts payable |
$ | 202,616 | $ | 179,191 | |||
Short-term borrowings |
100,000 | 100,000 | |||||
Accrued expenses |
363,513 | 256,110 | |||||
Accrued income taxes |
44,955 | 23,453 | |||||
Deferred revenues |
226,080 | 208,996 | |||||
Customer funds held and retirement account deposits |
1,829,639 | 1,582,698 | |||||
Deferred income taxes |
134,330 | 95,276 | |||||
Long-term debt |
505,327 | 699,116 | |||||
Liabilities of discontinued operations held for sale |
2,412,467 | 1,869,527 | |||||
TOTAL LIABILITIES |
5,818,927 | 5,014,367 | |||||
COMMITMENTS AND CONTINGENCIES |
|||||||
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; 195,940,360 and 194,259,709 shares issued |
1,959 | 1,943 | |||||
Additional paid-in capital |
679,573 | 637,623 | |||||
Accumulated other comprehensive income |
26,695 | 17,345 | |||||
Accumulated earnings |
1,920,539 | 1,542,897 | |||||
Treasury stock, at cost, 1,691,500 shares at December 31, 2004 |
(64,344 | ) | | ||||
TOTAL SHAREHOLDERS EQUITY |
2,564,422 | 2,199,808 | |||||
TOTAL |
$ | 8,383,349 | $ | 7,214,175 | |||
See notes to consolidated financial statements.
3
CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
Common Stock |
Additional Paid-In Capital |
Comprehensive Income |
Accumulated Other Comprehensive Income |
Accumulated Earnings |
Treasury Stock |
||||||||||||||||||
(In thousands) |
Shares |
Amount |
|||||||||||||||||||||
Balance at December 31, 2001 |
190,281 | $ | 1,903 | $ | 564,959 | $ | 76,216 | $ | 961,748 | | |||||||||||||
Net income |
$ | 266,137 | 266,137 | ||||||||||||||||||||
Foreign currency translation |
1,166 | 1,166 | |||||||||||||||||||||
Change in unrealized gains on available-for-sale investments - net of tax |
(45,184 | ) | (45,184 | ) | |||||||||||||||||||
Reclassification adjustment for realized investment gains included in net income |
(1,573 | ) | (1,573 | ) | |||||||||||||||||||
Fair market value adjustment on cash flow hedges - net of tax |
(6,743 | ) | (6,743 | ) | |||||||||||||||||||
Comprehensive income |
$ | 213,803 | |||||||||||||||||||||
Shares issued under stock plans including income tax benefits |
2,169 | 21 | 34,741 | $ | 7,856 | ||||||||||||||||||
Purchase of treasury stock |
(33,578 | ) | |||||||||||||||||||||
Balance at December 31, 2002 |
192,450 | 1,924 | 599,700 | 23,882 | 1,227,885 | (25,722 | ) | ||||||||||||||||
Net income |
$ | 315,012 | 315,012 | ||||||||||||||||||||
Foreign currency translation |
1,078 | 1,078 | |||||||||||||||||||||
Change in unrealized gains on available-for-sale investments - net of tax |
(927 | ) | (927 | ) | |||||||||||||||||||
Reclassification adjustment for realized investment gains included in net income |
(10,264 | ) | (10,264 | ) | |||||||||||||||||||
Fair market value adjustment on cash flow hedges - net of tax |
3,576 | 3,576 | |||||||||||||||||||||
Comprehensive income |
$ | 308,475 | |||||||||||||||||||||
Shares issued under stock plans including income tax benefits |
1,265 | 13 | 20,411 | 11,761 | |||||||||||||||||||
Shares issued for acquired companies |
545 | 6 | 17,512 | 13,961 | |||||||||||||||||||
Balance at December 31, 2003 |
194,260 | 1,943 | 637,623 | 17,345 | 1,542,897 | | |||||||||||||||||
Net income |
$ | 377,642 | 377,642 | ||||||||||||||||||||
Foreign currency translation |
634 | 634 | |||||||||||||||||||||
Change in unrealized gains on available-for-sale investments - net of tax |
3,253 | 3,253 | |||||||||||||||||||||
Fair market value adjustment on cash flow hedges - net of tax |
5,463 | 5,463 | |||||||||||||||||||||
Comprehensive income |
$ | 386,992 | |||||||||||||||||||||
Shares issued under stock plans including income tax benefits |
1,680 | 16 | 41,950 | | |||||||||||||||||||
Purchase of treasury stock |
(64,344 | ) | |||||||||||||||||||||
Balance at December 31, 2004 |
195,940 | $ | 1,959 | $ | 679,573 | $ | 26,695 | $ | 1,920,539 | $ | (64,344 | ) | |||||||||||
See notes to consolidated financial statements.
4
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Years ended December 31,
2004 |
2003 |
2002 |
||||||||||
CASH FLOWS FROM OPERATING ACTIVITIES: |
||||||||||||
Net income |
$ | 377,642 | $ | 315,012 | $ | 266,137 | ||||||
Adjustment for discontinued operations |
17,256 | (6,189 | ) | (6,806 | ) | |||||||
Adjustments to reconcile net income to net cash provided by operating activities from continuing operations: |
||||||||||||
Deferred income taxes |
23,022 | 27,488 | 26,296 | |||||||||
Depreciation and amortization |
185,363 | 165,838 | 134,389 | |||||||||
Changes in assets and liabilities, net of effects from acquisitions of businesses: |
||||||||||||
Accounts receivable |
(19,177 | ) | 17,268 | 6,022 | ||||||||
Prepaid expenses and other assets |
(4,518 | ) | 4,803 | (7,144 | ) | |||||||
Accounts payable and accrued expenses |
54,445 | 33,371 | 12,401 | |||||||||
Deferred revenues |
17,826 | 9,420 | 10,072 | |||||||||
Accrued income taxes |
46,524 | 28,674 | 39,756 | |||||||||
Net cash provided by operating activities from continuing operations |
698,383 | 595,685 | 481,123 | |||||||||
CASH FLOWS FROM INVESTING ACTIVITIES: |
||||||||||||
Capital expenditures, including capitalization of software costs for external customers |
(161,093 | ) | (139,111 | ) | (137,126 | ) | ||||||
Payment for acquisitions of businesses, net of cash acquired |
(64,896 | ) | (735,917 | ) | (362,578 | ) | ||||||
Investments |
(139,258 | ) | 139,432 | (307,406 | ) | |||||||
Net cash used in investing activities from continuing operations |
(365,247 | ) | (735,596 | ) | (807,110 | ) | ||||||
CASH FLOWS FROM FINANCING ACTIVITIES: |
||||||||||||
Proceeds from short-term borrowings |
| | 43,514 | |||||||||
Proceeds from long-term debt |
17,303 | 248,268 | 156,481 | |||||||||
Repayments of long-term debt |
(210,243 | ) | (32,474 | ) | (16,908 | ) | ||||||
Issuance of common stock and treasury stock |
30,666 | 18,585 | 11,420 | |||||||||
Purchases of treasury stock |
(64,344 | ) | | (33,578 | ) | |||||||
Customer funds held and retirement account deposits |
246,941 | (124,760 | ) | 260,884 | ||||||||
Net cash provided by financing activities from continuing operations |
20,323 | 109,619 | 421,813 | |||||||||
Change in cash and cash equivalents |
353,459 | (30,292 | ) | 95,826 | ||||||||
Beginning balance |
162,668 | 192,960 | 97,134 | |||||||||
Ending balance |
$ | 516,127 | $ | 162,668 | $ | 192,960 | ||||||
Net cash (used in) provided by discontinued operations |
$ | (4,251 | ) | $ | 5,821 | $ | (4,675 | ) | ||||
See notes to consolidated financial statements.
5
Notes to Consolidated Financial Statements
For the years ended December 31, 2004, 2003 and 2002
1. Summary of Significant Accounting Policies
DESCRIPTION OF THE BUSINESS
Fiserv, Inc. and subsidiaries (the Company) is an independent provider of 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 Companys operations are primarily in the United States and consist of three business segments based on the services provided by each: Financial institution outsourcing, systems and services; Health plan management services; and Investment support services. The Financial institution outsourcing, systems and services segment provides account and transaction processing products and services to financial institutions and other financial intermediaries. The Health plan management services segment provides services primarily to employers who self-insure their health plans, including services such as handling payments to healthcare providers, assisting with cost controls, plan design services and prescription benefit management. The Investment support services segment provides retirement plan administration services to individual retirement plan and pension administrators, financial planners and financial institutions.
DISCONTINUED OPERATIONS
On December 16, 2004, the Company announced it had reached a definitive agreement to sell its securities clearing businesses to the National Financial unit of Fidelity Investments for a price of approximately $365 million. The transaction is subject to standard and customary closing conditions and is expected to close in the first quarter of 2005. In accordance with Statement of Financial Accounting Standards (SFAS) No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, the financial results of the Companys securities clearing businesses are reported as discontinued operations for all periods presented.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Fiserv, Inc. and all majority owned subsidiaries. All significant intercompany transactions and balances have been eliminated in consolidation.
RECLASSIFICATIONS
Certain amounts reported in prior periods have been reclassified to conform to the 2004 presentation. The reclassifications did not impact the Companys net income or net income per share.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
FAIR VALUES
The fair values of cash equivalents, accounts receivable, accounts payable, short-term borrowings, accrued expenses and customer funds held and retirement account deposits approximate the carrying values due to the short period of time to maturity. The fair value of investments is determined based on quoted market prices. The fair value of long-term debt is estimated using discounted cash flows based on the Companys current incremental borrowing rates or dealer quotes and the fair value of derivative instruments is determined based on dealer quotes.
NEW ACCOUNTING PRONOUNCEMENT
In December 2004, the Financial Accounting Standards Board issued SFAS No.123 (revised 2004), Share-Based Payment (SFAS 123R), that requires companies to expense the value of employee stock options, discounts on employee stock purchase plans and similar awards. Under SFAS 123R, share-based payment awards result in a cost that will be measured at fair value on the awards grant date, based on the estimated number of awards that are expected to vest. SFAS 123R is effective for periods beginning after June 15, 2005, and applies to all outstanding and unvested share-based payment awards at the adoption date. The Company has not completed its evaluation of the impact of adopting SFAS 123R.
DERIVATIVE INSTRUMENTS
The Company accounts for its derivative instruments in accordance with SFAS Nos. 133, 137 and 149 related to Accounting for Derivative Instruments and Hedging Activities (SFAS No. 133, as amended). Derivative instruments are recorded on the balance sheet as either an asset or liability measured at their fair value. If the derivative is designated as a fair value hedge, the changes in the fair value of the derivative are recognized in earnings. To the extent the hedge is effective, there is an offsetting adjustment to the basis of the item being hedged. If the derivative is designated as a cash flow hedge, the effective portions of the changes in the fair value of the derivative are recorded as a component of accumulated other comprehensive income and recognized in the consolidated statements of income when the hedged item affects earnings. Ineffective portions of changes in the fair value of hedges are recognized in earnings.
The Companys existing fair value and cash flow hedges are effective. As a result, there is no current impact on earnings due to hedge ineffectiveness. It is the policy of the Company to execute such instruments with credit-worthy banks and not to enter into derivative financial instruments for speculative purposes.
REVENUE RECOGNITION
Revenues from the sale of data processing services, consulting and administration fees on investment accounts are recognized as the related services are provided or when the product is shipped. Revenues from investment support services include net investment income of $74.1 million, $67.4 million and $76.0 million in 2004, 2003 and 2002, respectively. Revenues from software license fees (representing approximately 4%, 5% and 7% of 2004, 2003 and 2002 processing and services revenues, respectively) are recognized when written contracts are signed, delivery of the product has occurred, the fee is fixed or determinable and collection is probable. Maintenance fee revenues are recognized ratably over the term of the related support period; generally 12 months. Deferred revenues consist primarily of advance billings for services and are recognized as revenues when the services are provided.
6
Revenues from our pharmacy network contracts where we are the principal are recognized on a gross basis, at the prescription price (ingredient cost plus dispensing fee) negotiated with our clients, excluding the portion of the price to be settled directly by the member (co-payment), plus our administrative fees. Our responsibilities under our client contract to adjudicate member claims properly, our separate contractual pricing relationships and responsibilities to the pharmacies in our networks, and our interaction with members, among other factors, qualify us as the principal under the indicators set forth in Emerging Issues Task Force No. 99-19 Reporting Gross Revenues as a Principal vs. Net as an Agent in the majority of our transactions with customers.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of cash and investments with original maturities of 90 days or less.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
The Company specifically analyzes accounts receivable and historical bad debts, customer credit-worthiness, current economic trends, and changes in our customer payment terms and collection trends when evaluating the adequacy of its allowance for doubtful accounts. Any change in the assumptions used in analyzing a specific account receivable may result in an additional allowance for doubtful accounts being recognized in the period in which the change occurs. The balance in the allowance for doubtful accounts was $29.5 million and $25.9 million at December 31, 2004 and 2003, respectively.
INVESTMENTS
The following summarizes the Companys investments at December 31:
2004 (In thousands) |
Amortized/ Historical Cost |
Gross Unrealized Gains |
Gross Unrealized Losses |
Estimated Fair Value |
Carrying Value | |||||||||||
Mortgage-backed obligations |
$ | 1,496,969 | $ | 8,249 | $ | (33,647 | ) | $ | 1,471,571 | $ | 1,496,969 | |||||
Corporate debt obligations |
27,658 | 3,218 | | 30,876 | 27,658 | |||||||||||
Other fixed income obligations |
990 | 4 | | 994 | 990 | |||||||||||
Total held-to-maturity investments |
1,525,617 | 11,471 | (33,647 | ) | 1,503,441 | 1,525,617 | ||||||||||
Available-for-sale investments |
30,436 | 50,124 | | 80,560 | 80,560 | |||||||||||
Money market mutual funds |
131,872 | | | 131,872 | 131,872 | |||||||||||
Repurchase agreements |
225,000 | | | 225,000 | 225,000 | |||||||||||
Other investments |
21,487 | | | 21,487 | 21,487 | |||||||||||
TOTAL |
$ | 1,934,412 | $ | 61,595 | $ | (33,647 | ) | $ | 1,962,360 | $ | 1,984,536 | |||||
2003 (In thousands) |
Amortized/ Historical Cost |
Gross Unrealized Gains |
Gross Unrealized Losses |
Estimated Fair Value |
Carrying Value | |||||||||||
Mortgage-backed obligations |
$ | 1,604,737 | $ | 11,052 | $ | (28,732 | ) | $ | 1,587,057 | $ | 1,604,737 | |||||
Corporate debt obligations |
30,422 | 4,401 | | 34,823 | 30,422 | |||||||||||
Private mortgage-backed securities |
9,383 | 242 | | 9,625 | 9,383 | |||||||||||
Other fixed income obligations |
3,711 | 108 | | 3,819 | 3,711 | |||||||||||
Total held-to-maturity investments |
1,648,253 | 15,803 | (28,732 | ) | 1,635,324 | 1,648,253 | ||||||||||
Available-for-sale investments |
8,069 | 45,139 | | 53,208 | 53,208 | |||||||||||
Money market mutual funds |
61,968 | | | 61,968 | 61,968 | |||||||||||
Repurchase agreements |
55,030 | | | 55,030 | 55,030 | |||||||||||
Other investments |
20,466 | | | 20,466 | 20,466 | |||||||||||
TOTAL |
$ | 1,793,786 | $ | 60,942 | $ | (28,732 | ) | $ | 1,825,996 | $ | 1,838,925 | |||||
7
The Companys Investment support services subsidiaries accept money market deposits from customers and invest the funds in securities. Such amounts due to customers represent the primary source of funds for the Companys investment securities and amounted to $1.8 billion and $1.5 billion as of December 31, 2004 and 2003, respectively. The Companys mortgage-backed obligations consist primarily of GNMA, FNMA and FHLMC mortgage-backed pass-through securities and collateralized mortgage obligations rated AAA by Standard and Poors. Mortgage-backed obligations may contain prepayment risk and the Company has never experienced a default on these types of securities. Substantially all of the Investment support services subsidiarys investments are rated AAA or equivalent except for certain corporate debt obligations which are classified as investment grade. Investments in mortgage-backed obligations and certain fixed income obligations had an average duration of approximately three years and five months at December 31, 2004. These investments are accounted for as held-to-maturity and are carried at amortized cost as the Company has the ability and intent to hold these investments to maturity.
Available-for-sale investments are carried at market, based upon quoted market prices. Unrealized gains or losses on available-for-sale investments are accumulated in shareholders equity as accumulated other comprehensive income, net of related deferred income taxes. Realized gains or losses are computed based on specific identification of the investments sold, based on the trade date.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation and amortization are computed primarily using the straight-line method over the estimated useful lives of the assets. Property and equipment consist of the following at December 31:
(In thousands) | Estimated |
2004 |
2003 | |||||
Data processing equipment |
3 to 5 years | $ | 368,502 | $ | 318,594 | |||
Buildings and leasehold improvements |
5 to 40 years | 125,179 | 120,109 | |||||
Furniture and equipment |
3 to 10 years | 122,056 | 119,011 | |||||
615,737 | 557,714 | |||||||
Less accumulated depreciation and amortization |
401,938 | 357,135 | ||||||
TOTAL |
$ | 213,799 | $ | 200,579 | ||||
INTANGIBLE ASSETS
Intangible assets consist of the following at December 31:
2004 (In thousands) |
Gross Carrying Amount |
Accumulated Amortization |
Net Book Value | ||||||
Software development costs for external customers |
$ | 507,122 | $ | 352,429 | $ | 154,693 | |||
Purchased software |
212,280 | 136,273 | 76,007 | ||||||
Customer base |
312,091 | 86,996 | 225,095 | ||||||
Trade names |
57,744 | | 57,744 | ||||||
Other |
10,041 | 4,131 | 5,910 | ||||||
TOTAL |
$ | 1,099,278 | $ | 579,829 | $ | 519,449 | |||
2003 (In thousands) |
Gross Carrying Amount |
Accumulated Amortization |
Net Book Value | ||||||
Software development costs for external customers |
$ | 446,550 | $ | 294,727 | $ | 151,823 | |||
Purchased software |
188,484 | 112,103 | 76,381 | ||||||
Customer base |
333,309 | 71,951 | 261,358 | ||||||
Trade names |
56,911 | | 56,911 | ||||||
Other |
4,846 | 2,407 | 2,439 | ||||||
TOTAL |
$ | 1,030,100 | $ | 481,188 | $ | 548,912 | |||
Software development costs for external customers include internally generated computer software for external customers and software acquired in conjunction with acquisitions of businesses. The Company capitalizes certain costs incurred to develop new software or enhance existing software which is marketed externally or utilized by the Company to process customer transactions in accordance with SFAS No. 86, Accounting for the Costs of Computer Software to Be Sold, Leased, or Otherwise Marketed. Costs are capitalized commencing when the technological feasibility of the software has been established. Routine maintenance of software products, design costs and development costs incurred prior to establishment of a products technological feasibility are expensed as incurred. Amortization of all software is computed on a straight-line basis over the expected useful life of the product, generally three to five years.
Gross software development costs for external customers capitalized for new products and enhancements to existing products totaled $47.8 million, $51.9 million and $44.9 million in 2004, 2003 and 2002, respectively. Amortization of previously capitalized development costs, included in depreciation and amortization, was $60.2 million, $47.8 million and $38.3 million in 2004, 2003 and 2002, respectively, resulting in net capitalized (amortized) development costs of $(12.4) million, $4.1 million and $6.6 million in 2004, 2003 and 2002, respectively.
Customer base intangible assets represent customer contracts and relationships obtained as part of acquired businesses and are amortized using the straight-line method over their estimated useful lives, ranging from five to 20 years. Trade names have been determined to have indefinite lives and therefore are not amortized in accordance with the provisions of SFAS No. 142 Goodwill and Other Intangible Assets. Other intangible assets consist primarily of non-compete agreements, which are generally amortized over their estimated useful lives.
8
Amortization expense for intangible assets was $110.5 million, $90.0 million and $74.4 million for the years ended December 31, 2004, 2003 and 2002, respectively. Aggregate amortization expense with respect to existing intangible assets with finite lives resulting from acquisitions of businesses, excluding software amortization, should approximate $20 million annually.
GOODWILL
The excess of the purchase price over the estimated fair value of tangible and identifiable intangible assets acquired is recorded as goodwill. The changes in the carrying amount of goodwill by business segment during the years ended December 31, 2004 and 2003 are as follows:
(In thousands) | Financial Institution and Services |
Health Plan Management Services |
Investment Support Services |
Total | ||||||||
Balance, December 31, 2002 |
$ | 1,013,267 | $ | 171,090 | $ | 1,593 | $ | 1,185,950 | ||||
Goodwill additions |
319,256 | 216,116 | | 535,372 | ||||||||
Balance, December 31, 2003 |
1,332,523 | 387,206 | 1,593 | 1,721,322 | ||||||||
Goodwill additions |
68,728 | 69,297 | | 138,025 | ||||||||
Balance, December 31, 2004 |
$ | 1,401,251 | $ | 456,503 | $ | 1,593 | $ | 1,859,347 | ||||
IMPAIRMENT OF LONG-LIVED ASSETS
The Company assesses the likelihood of recovering the cost of long-lived assets based on current and projected operating results and cash flows of the related business operations using undiscounted cash flow analyses. These factors, along with managements plans with respect to the operations, are considered in assessing the recoverability of property and equipment and intangible assets subject to amortization. Measurement of any impairment loss is based on discounted operating cash flows.
SHORT-TERM BORROWINGS
The Companys Investment support services subsidiaries had short-term borrowings of $100.0 million as of December 31, 2004 and 2003, with an average interest rate of 2.6% and 1.6% as of December 31, 2004 and 2003, respectively, and were collateralized by investments valued at $102.0 million at December 31, 2004 and 2003.
INCOME TAXES
The Company accounts for income taxes under SFAS No. 109, Accounting for Income Taxes. Under these rules, certain assumptions are made which represent significant estimates. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between financial statement carrying amounts of existing assets and liabilities and their respective tax basis, net operating loss and tax credit carryforwards, and tax contingencies. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. A valuation allowance is recorded against deferred tax assets for which utilization of the asset is not likely.
NET INCOME PER SHARE
Basic net income per share is computed using the weighted-average number of common shares outstanding during the periods. Diluted net income per share is computed using the weighted-average number of common and dilutive common equivalent shares outstanding during the periods. Common equivalent shares consist primarily of stock options and are computed using the treasury stock method. During the years ended December 31, 2004, 2003 and 2002, the Company excluded 4.1 million, 3.4 million and 1.3 million weighted-average shares under stock options, respectively, from the calculation of common equivalent shares as the impact was anti-dilutive.
The computation of the number of shares used in calculating basic and diluted net income per common share is as follows:
(In thousands) | 2004 |
2003 |
2002 | |||
Weighted-average common shares outstanding used for calculation of net income per share- basic |
194,981 | 193,240 | 191,386 | |||
Common stock equivalents |
2,306 | 2,697 | 3,565 | |||
Total shares used for calculation of net income per share - diluted |
197,287 | 195,937 | 194,951 | |||
9
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 consolidated financial statements for its stock-based compensation plans. 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 issued 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 and are amortized utilizing tranche-specific vesting. 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. 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.
(In thousands, except per share data) | 2004 |
2003 |
2002 |
|||||||||
Net income: |
||||||||||||
As reported |
$ | 377,642 | $ | 315,012 | $ | 266,137 | ||||||
Less: stock compensation expense - net of tax |
(18,000 | ) | (17,000 | ) | (18,200 | ) | ||||||
Pro forma |
$ | 359,642 | $ | 298,012 | $ | 247,937 | ||||||
Reported net income per share: |
||||||||||||
Basic |
$ | 1.94 | $ | 1.63 | $ | 1.39 | ||||||
Diluted |
1.91 | 1.61 | 1.37 | |||||||||
Pro forma net income per share: |
||||||||||||
Basic |
$ | 1.85 | $ | 1.54 | $ | 1.30 | ||||||
Diluted |
1.82 | 1.52 | 1.27 |
The fair value of each stock option granted in 2004 was estimated on the date of grant using a binomial option-pricing model; the 2003 and 2002 stock options were estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions:
2004 |
2003 |
2002 |
|||||||
Expected life (in years) |
5.5 | 5.0 | 5.0 | ||||||
Risk-free interest rate |
3.1 | % | 3.0 | % | 4.4 | % | |||
Volatility |
33.6 | % | 52.3 | % | 50.0 | % | |||
Dividend yield |
0.0 | % | 0.0 | % | 0.0 | % |
The weighted-average estimated fair value of stock options granted during the years ended December 31, 2004, 2003 and 2002 was $13.56, $15.14 and $20.24 per share, respectively.
SHAREHOLDER RIGHTS PLAN
The Company has a shareholder rights plan. Under this plan, each shareholder holds one preferred stock purchase right for each outstanding share of the Companys common stock held. The stock purchase rights are not exercisable until certain events occur.
ACCUMULATED OTHER COMPREHENSIVE INCOME
Accumulated other comprehensive income consists of the following at December 31:
(In thousands) | 2004 |
2003 |
||||||
Unrealized gains on investments, net of tax |
$ | 32,085 | $ | 28,832 | ||||
Unrealized losses on cash flow hedges, net of tax |
(5,673 | ) | (11,136 | ) | ||||
Foreign currency translation adjustments |
283 | (351 | ) | |||||
TOTAL |
$ | 26,695 | $ | 17,345 | ||||
SUPPLEMENTAL CASH FLOW INFORMATION
(In thousands) | 2004 |
2003 |
2002 | ||||||
Interest paid |
$ | 25,495 | $ | 22,164 | $ | 17,724 | |||
Income taxes paid |
177,017 | 144,130 | 97,808 | ||||||
Liabilities assumed in acquisitions of businesses |
10,507 | 85,072 | 29,033 |
10
2. Acquisitions
During 2004, 2003 and 2002 the Company completed the following acquisitions of businesses. The results of operations of these acquired businesses have been included in the accompanying consolidated statements of income from the dates of acquisition.
Company |
Month Acquired |
Service |
Consideration | |||
2004: | ||||||
RegEd, Inc. | Jan. | Insurance/securities training | Cash for stock | |||
Pharmacy Fulfillment, Inc. | Aug. | Health plan management | Cash for stock | |||
Results International Systems, Inc. | Aug. | Insurance data processing | Cash for stock | |||
CheckAGAIN, LLC | Oct. | Item processing | Cash for assets | |||
2003: | ||||||
AVIDYN, Inc. | Jan. | Health plan management | Stock for stock | |||
Precision Computer Systems, Inc. | Mar. | Software and services | Cash for stock | |||
ReliaQuote, Inc. | Apr. | Insurance services | Cash for stock | |||
WBI Holdings Corporation | May | Health plan management | Cash for stock | |||
Electronic Data Systems Corporations | ||||||
Credit Union Industry Group business | July | Credit union data processing | Cash for assets | |||
Chase Credit Systems Inc. | ||||||
& Chase Credit Research Inc. | July | Lending services | Cash for stock | |||
Unisure, Inc. | Sept. | Insurance data processing | Cash for assets | |||
Insurance Management Solutions Group, Inc. | Sept. | Insurance data processing | Cash for stock | |||
GAC Holdings Corporation | Sept. | Lending services | Cash for stock | |||
Federal Home Loan Bank of Indianapolis | ||||||
IP services | Oct. | Item processing | Cash for assets | |||
MI-Assistant Software, Inc. | Nov. | Insurance software systems | Cash for assets | |||
MedPay Corporation | Dec. | Health plan management | Cash for stock | |||
2002: | ||||||
Case, Shiller, Weiss, Inc. | May | Lending services | Cash for stock | |||
Investec Ernst & Companys | ||||||
clearing operations | Aug. | Securities clearing services* | Cash for assets | |||
Willis Groups TPA operations | Nov. | Health plan management | Cash for assets | |||
Electronic Data Systems Corporations | ||||||
Consumer Network Services business | Dec. | EFT data processing | Cash for assets | |||
Lenders Financial Services | Dec. | Lending services | Cash for stock |
* | Results included in discontinued operations |
During 2004, 2003 and 2002, the Company completed four, 12 and five acquisitions, respectively. Net cash paid for these acquisitions was $35.7 million, $702.8 million and $322.9 million, respectively, subject to certain adjustments. Pro forma information for 2004 is not being provided as the 2004 acquisitions did not have a material effect on the Companys results of operations.
The Company may be required to pay additional cash consideration for acquisitions up to estimated maximum payments of $129.9 million through 2007, if certain of the acquired entities achieve specific escalating operating income targets. The Company has recorded a liability of $74.3 million at December 31, 2004 as an estimate of the additional cash consideration to be paid. During 2004, as a result of previously acquired entities achieving their operating income targets, the Company paid additional cash consideration of $29.2 million. The additional consideration was treated as additional purchase price.
11
3. Dispositions
On December 16, 2004, the Company entered into an Agreement among Fiserv, Inc., Fiserv Clearing, Inc. and National Financial Services LLC (National Financial) to sell its securities clearing businesses pursuant to which National Financial will acquire all of the outstanding shares of BHC Investments, Inc., a subsidiary of Fiserv (BHC), for approximately $349 million in cash payable at closing, subject to certain post-closing adjustments, plus a contingent payment of up to $15 million to be paid after the first anniversary of the closing date based on achievement of specific revenue targets. Consummation of the transaction is subject to customary conditions to closing, including receipt of regulatory approvals. The Agreement provides that the Company will be required to retain certain liabilities of BHC, including, among others, those relating to the previously announced Securities and Exchange Commission investigation of Fiserv Securities, Inc (see Note 7). The transaction is expected to be completed in the first quarter of 2005 and the Company does not anticipate a material gain or loss as a result of this transaction. Pursuant to SFAS No. 144,Accounting for the Impairment or Disposal of Long-Lived Assets, the assets and liabilities, results of operations and cash flows of the securities clearing businesses have been accounted for as "Discontinued Operations" in the accompanying Consolidated Financial Statements and all prior periods have been restated.
Assets and liabilities of discontinued operations are presented separately under the captions Assets of discontinued operations held for sale and Liabilities of discontinued operations held for sale, respectively, in the accompanying Consolidated Balance Sheets and consist of the following at December 31:
(In thousands) | 2004 |
2003 | ||||
Assets of discontinued operations: |
||||||
Cash and cash equivalents |
$ | 35,849 | $ | 40,100 | ||
Securities processing receivables |
2,404,215 | 1,940,414 | ||||
Prepaid expenses and other assets |
27,632 | 21,753 | ||||
Investments |
128,279 | 65,236 | ||||
Property and equipment |
4,140 | 5,497 | ||||
Intangible assets and goodwill |
151,402 | 152,833 | ||||
TOTAL |
$ | 2,751,517 | $ | 2,225,833 | ||
Liabilities of discontinued operations: |
||||||
Accounts payable and accruals |
$ | 53,328 | $ | 43,764 | ||
Securities processing payables |
2,349,139 | 1,786,763 | ||||
Short-term borrowings |
10,000 | 39,000 | ||||
TOTAL |
$ | 2,412,467 | $ | 1,869,527 | ||
Processing and services revenues from the securities clearing businesses included in "Income (loss) from discontinued operations" were $114.8 million, $107.5 million and $106.7 million in 2004, 2003 and 2002, respectively. Income tax expense (benefit) for the securities clearing businesses was $(0.1 million), $4.0 million and $4.4 million for the years ended December 31, 2004, 2003 and 2002, respectively. Future minimum operating lease commitments for the securities clearing businesses at December 31, 2004 were $38.7 million.
12
4. Long-term debt
The Company has available a $700.0 million unsecured line of credit and commercial paper facility with a group of banks, of which $195.0 million was in use at December 31, 2004, with a weighted-average variable interest rate of 2.8% and 1.8% at December 31, 2004 and 2003, respectively. The credit facilities, which expire in May 2009, consist of a $465.3 million five-year revolving credit facility and a $234.7 million 364-day revolving credit facility which is subject to renewal annually through 2009. There were no significant commitment fees or compensating balance requirements under these facilities. The Company must, among other requirements, maintain a minimum net worth of $1.8 billion as of December 31, 2004 and limit its total debt to no more than three and one-half times the Companys earnings before interest, taxes, depreciation and amortization. The Company was in compliance with all debt covenants throughout 2004.
At December 31, 2004, the Company had cash flow interest rate swap agreements to fix the interest rates on certain floating-rate debt at a rate approximating 6.8% (based on current bank fees and spreads) for a notional amount of $200.0 million until December 2005. During the second quarter of 2003, the Company entered into additional cash flow interest rate swap agreements to fix the interest rates on certain floating-rate debt at an average rate approximating 5.0% (based on current bank fees and spreads) for a notional amount of $150.0 million from December 2005 to 2008. The estimated fair values of the cash flow hedges are $9.1 million and $18.0 million as of December 31, 2004 and 2003, respectively, and are included in the accompanying consolidated balance sheets in accrued expenses and as a component of accumulated other comprehensive income, net of deferred taxes.
In addition, the Company had fixed-to-floating interest rate swap agreements on the $150.0 million 4% senior notes due April 2008, with a variable interest rate of approximately 3.0% at December 31, 2004. The estimated fair values of the fair value hedges are $2.0 million and $0.5 million as of December 31, 2004 and 2003, respectively, and are included in the accompanying consolidated balance sheets in accrued expenses and long-term debt.
The carrying value and estimated fair values of the Companys long-term debt are as follows at December 31:
2004 |
2003 | |||||||||||
(In thousands) | Carrying Value |
Estimated Fair Value |
Carrying Value |
Estimated Fair Value | ||||||||
Bank notes and commercial paper, at short-term rates |
$ | 194,993 | $ | 194,993 | $ | 395,600 | $ | 395,600 | ||||
3.0% senior notes payable, due 2008 |
99,922 | 95,877 | 99,900 | 96,921 | ||||||||
4.0% senior notes payable, due 2008 |
147,957 | 148,875 | 149,897 | 151,540 | ||||||||
Other |
62,455 | 62,837 | 53,719 | 55,235 | ||||||||
Total long-term debt |
$ | 505,327 | $ | 502,582 | $ | 699,116 | $ | 699,296 | ||||
Annual principal payments required under the terms of the long-term debt agreements are as follows at December 31, 2004:
(In thousands) | |||
Years ending December 31, |
|||
2005 |
$ | 47,486 | |
2006 |
3,917 | ||
2007 |
3,863 | ||
2008 |
251,619 | ||
2009 |
198,442 | ||
TOTAL |
$ | 505,327 | |
5. Income taxes
A reconciliation of recorded income tax expense from continuing operations with income tax computed at the statutory federal tax rates is as follows for the three years ended December 31:
(In thousands) | 2004 |
2003 |
2002 |
|||||||||
Statutory federal tax rate |
35 | % | 35 | % | 35 | % | ||||||
Tax computed at statutory rate |
$ | 224,478 | $ | 177,193 | $ | 148,796 | ||||||
State income taxes, net of federal effect |
22,983 | 19,047 | 15,794 | |||||||||
Foreign tax credit carryover |
(2,431 | ) | | | ||||||||
Other - net |
1,438 | 1,204 | 1,211 | |||||||||
TOTAL |
$ | 246,468 | $ | 197,444 | $ | 165,801 | ||||||
13
The provision for income taxes from continuing operations consisted of the following at December 31:
(In thousands) | 2004 |
2003 |
2002 |
|||||||||
Current: |
||||||||||||
Federal |
$ | 181,981 | $ | 138,010 | $ | 116,252 | ||||||
State |
34,148 | 27,506 | 21,490 | |||||||||
Foreign |
7,317 | 4,440 | 1,763 | |||||||||
223,446 | 169,956 | 139,505 | ||||||||||
Deferred: |
||||||||||||
Federal |
22,894 | 28,890 | 25,511 | |||||||||
State |
1,134 | 1,431 | 1,592 | |||||||||
Foreign |
(1,006 | ) | (2,833 | ) | (807 | ) | ||||||
23,022 | 27,488 | 26,296 | ||||||||||
TOTAL |
$ | 246,468 | $ | 197,444 | $ | 165,801 | ||||||
Significant components of the Companys deferred tax assets and liabilities consist of the following at December 31:
(In thousands) | 2004 |
2003 |
||||||
Reserve for bad debts |
$ | 10,137 | $ | 8,528 | ||||
Purchased incomplete software technology |
22,461 | 26,672 | ||||||
Accrued expenses not currently deductible |
26,667 | 22,474 | ||||||
Deferred revenues |
4,728 | 14,203 | ||||||
Unrealized losses on cash flow hedges |
3,418 | 7,003 | ||||||
Net operating loss carryforwards |
2,932 | 1,950 | ||||||
Other |
8,767 | 7,212 | ||||||
Total deferred tax assets |
79,110 | 88,042 | ||||||
Software development costs for external customers |
(40,384 | ) | (42,499 | ) | ||||
Excess of tax over book depreciation |
(25,463 | ) | (21,750 | ) | ||||
Excess of tax over book amortization |
(105,912 | ) | (87,102 | ) | ||||
Unrealized gains on investments |
(18,081 | ) | (16,341 | ) | ||||
Other |
(23,600 | ) | (15,626 | ) | ||||
Total deferred tax liabilities |
(213,440 | ) | (183,318 | ) | ||||
TOTAL |
$ | (134,330 | ) | $ | (95,276 | ) | ||
Tax benefits associated with the exercise of non-qualified employee stock options were credited directly to additional paid-in capital and amounted to $11.3 million, $13.2 million and $31.2 million in 2004, 2003 and 2002, respectively.
At December 31, 2004, the Company has state net operating loss carryforwards of $35.4 million, with expiration dates ranging from 2005 through 2024. At December 31, 2004, the Company also has foreign tax credit carryforwards of $3.8 million with expiration dates ranging from 2005 through 2012.
6. Employee Benefit Plans
STOCK OPTION AND RESTRICTED STOCK PLAN
The Company's Stock Option and Restricted Stock Plan (the Plan) provides for the granting to its employees and directors of restricted stock and either incentive or non-qualified options to purchase shares of the Companys common stock for a price not less than 100% of the fair value of the shares at the date of grant. 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. At December 31, 2004, options to purchase 6.1 million shares were available for grant under the Plan.
Changes in stock options outstanding are as follows:
Number of Shares (In thousands) |
Weighted Average Exercise Price | |||||
Outstanding, December 31, 2001 |
13,003 | $ | 17.18 | |||
Granted |
1,519 | 41.21 | ||||
Forfeited |
(116 | ) | 24.49 | |||
Exercised |
(2,796 | ) | 10.70 | |||
Outstanding, December 31, 2002 |
11,610 | $ | 21.77 | |||
Granted |
1,719 | 30.96 | ||||
Forfeited |
(326 | ) | 36.90 | |||
Exercised |
(1,414 | ) | 9.37 | |||
Outstanding, December 31, 2003 |
11,589 | $ | 24.21 | |||
Granted |
1,282 | 38.19 | ||||
Forfeited |
(188 | ) | 36.19 | |||
Exercised |
(1,123 | ) | 12.42 | |||
Outstanding, December 31, 2004 |
11,560 | $ | 26.71 | |||
14
The number of shares under option that were exercisable at December 31, 2004, 2003 and 2002 were 8.5 million, 8.2 million and 8.1 million, at weighted-average exercise prices of $23.44, $20.19 and $16.69, respectively. The following summarizes information about the Company's stock options outstanding and exercisable at December 31, 2004:
Options Outstanding |
Options Outstanding and Exercisable | |||||||||||
Range of Exercise Prices |
Number of Shares (In thousands) |
Weighted- Average Exercise Price |
Weighted- Average Remaining Contractual Life (in years) |
Number of Shares (In thousands) |
Weighted- Average Exercise Price | |||||||
$5.38 - $10.67 |
1,630 | $ | 9.32 | 1.5 | 1,630 | $ | 9.32 | |||||
10.89 - 16.00 |
1,514 | 15.50 | 3.0 | 1,514 | 15.50 | |||||||
17.00 - 21.33 |
2,283 | 20.63 | 4.6 | 2,260 | 20.66 | |||||||
21.67 - 30.99 |
1,673 | 30.28 | 7.8 | 709 | 29.70 | |||||||
32.46 - 37.04 |
2,046 | 36.68 | 6.5 | 1,441 | 36.99 | |||||||
37.21 - 45.99 |
2,414 | 40.29 | 8.0 | 987 | 40.96 | |||||||
$5.38 - $45.99 |
11,560 | $ | 26.71 | 5.4 | 8,541 | $ | 23.44 | |||||
EMPLOYEE STOCK PURCHASE PLAN
The Companys employee stock purchase plan provides that eligible employees may purchase a limited number of shares of common stock each quarter through payroll deductions, at a purchase price equal to 85% of the closing price of the Companys common stock on the last business day of each calendar quarter. During the year ended December 31, 2004, 0.6 million shares were issued under the employee stock purchase plan. As of January 1, 2005, there were 1.0 million shares available for grant under this plan.
EMPLOYEE SAVINGS PLAN
The Company and its subsidiaries have defined contribution savings plans covering substantially all employees, under which eligible participants may elect to contribute a specified percentage of their salaries, subject to certain limitations. The Company makes matching contributions, subject to certain limitations, and makes discretionary contributions based upon the attainment of certain profit goals. Company contributions vest ratably at 20% for the first five years of each employees service. Company contributions charged to operations under these plans approximated $45.6 million, $44.3 million and $41.5 million in 2004, 2003 and 2002, respectively.
7. Leases, other commitments and contingencies
LEASES
The Company leases certain office facilities and equipment under operating leases. Future minimum rental payments on operating leases with initial noncancellable lease terms in excess of one year were due as follows as of December 31, 2004:
(In thousands) | |||
Years Ending December 31, |
|||
2005 |
$ | 85,664 | |
2006 |
73,817 | ||
2007 |
59,917 | ||
2008 |
49,011 | ||
2009 |
37,112 | ||
Thereafter |
105,799 | ||
TOTAL |
$ | 411,320 | |
Rent expense applicable to all operating leases was approximately $115.6 million, $111.2 million and $93.8 million during the years ended December 31, 2004, 2003 and 2002, respectively.
15
OTHER COMMITMENTS AND CONTINGENCIES
During 2004, the Companys broker-dealer subsidiary, Fiserv Securities, Inc. (FSI), responded to inquiries from the Securities and Exchange Commission (the SEC) as part of its industry-wide review of mutual fund trading practices. FSI has engaged in settlement discussions with the SEC as a result of an SEC investigation of FSI with respect to these matters. As a result of these discussions, FSI recorded a $16 million charge, included in discontinued operations, in 2004 with respect to these matters. A portion of any settlement amount with the SEC may be non-deductible for tax purposes. While no settlement with the SEC has been reached and no assurance can be given that these matters will be settled consistent with the amounts reserved, the Company does not anticipate any further material liability arising out of the SEC investigation.
In the normal course of business, the Company and its subsidiaries are named as defendants in various lawsuits in which claims are asserted against the Company. In the opinion of management, the liabilities, if any, which may ultimately result from such lawsuits are not expected to have a material adverse effect on the consolidated financial statements of the Company.
The Companys Investment support services subsidiaries had fiduciary responsibility for the administration of approximately $35 billion in trust funds as of December 31, 2004. The Company is also the custodian of cash deposited by customers with specific instructions as to its disbursement from active escrow and account servicing files. The balances in these custodial accounts were $90 million and $44 million at December 31, 2004 and 2003, respectively, and have not been included in the consolidated financial statements.
16
8. Business Segment Information
In 2004, the Company reclassified its reportable segments for all periods presented to better align with how the chief operating decision maker of the Company currently manages its businesses. The previously reported All other and corporate segment was removed as the printing and plastic card businesses included in that segment were reclassified to the Financial institution outsourcing, systems and services segment and corporate expenses were allocated to each segment based on the segments operating income as a percentage of total operating income. The securities clearing businesses which were historically presented in the Investment support services segment are reported under discontinued operations and are not included in the segment information below. The following table excludes the revenues and expenses associated with customer reimbursements because management believes that it is not appropriate to include the 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. Summarized financial information by business segment is as follows for each of the three years ended December 31:
(In thousands) | Financial Institution Outsourcing, Systems and Services |
Health Plan Management Services |
Investment Support Services |
Total | ||||||||
2004 |
||||||||||||
Processing and services revenues |
$ | 2,339,143 | $ | 885,916 | $ | 125,536 | $ | 3,350,595 | ||||
Operating income |
563,645 | 75,365 | 20,550 | 659,560 | ||||||||
Identifiable assets |
2,501,855 | 696,543 | 2,142,773 | 5,341,171 | ||||||||
Capital expenditures, including capitalization of software development costs for external customers |
143,958 | 11,829 | 5,306 | 161,093 | ||||||||
Depreciation and amortization expense |
154,558 | 16,700 | 14,105 | 185,363 | ||||||||
2003 |
||||||||||||
Processing and services revenues |
$ | 2,076,435 | $ | 399,066 | $ | 116,614 | $ | 2,592,115 | ||||
Operating income |
457,783 | 47,472 | 16,567 | 521,822 | ||||||||
Identifiable assets |
2,467,727 | 598,163 | 1,889,080 | 4,954,970 | ||||||||
Capital expenditures, including capitalization of software development costs for external customers |
124,889 | 10,141 | 4,081 | 139,111 | ||||||||
Depreciation and amortization expense |
138,146 | 11,852 | 15,840 | 165,838 | ||||||||
2002 |
||||||||||||
Processing and services revenues |
$ | 1,759,637 | $ | 216,145 | $ | 123,256 | $ | 2,099,038 | ||||
Operating income |
383,384 | 32,422 | 18,495 | 434,301 | ||||||||
Identifiable assets |
1,956,901 | 257,339 | 2,072,224 | 4,286,464 | ||||||||
Capital expenditures, including capitalization of software development costs for external customers |
121,994 | 7,580 | 7,552 | 137,126 | ||||||||
Depreciation and amortization expense |
111,616 | 7,371 | 15,402 | 134,389 |
A reconciliation of reportable segment identifiable asset amounts to the Companys consolidated balance sheets is as follows:
(In thousands) | 2004 |
2003 |
2002 | ||||||
Assets: |
|||||||||
Reportable segments |
$ | 5,341,171 | $ | 4,954,970 | $ | 4,286,464 | |||
Corporate |
290,661 | 33,372 | 97,421 | ||||||
Discontinued operations |
2,751,517 | 2,225,833 | 2,054,820 | ||||||
TOTAL |
$ | 8,383,349 | $ | 7,214,175 | $ | 6,438,705 | |||
The Companys domestic operations comprised approximately 97%, 96% and 95% of processing and services revenues for the years ended December 31, 2004, 2003 and 2002, respectively. No single customer accounted for more than 2%, 3% and 3% of consolidated processing and services revenues during the years ended December 31, 2004, 2003 and 2002, respectively.
17
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 Companys operations, markets, services and related products, prices and other factors discussed in the Companys prior filings with the Securities and Exchange Commission including the Companys ability to complete the proposed sale of its securities clearing businesses. 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.
CRITICAL ACCOUNTING POLICIES
The Companys consolidated financial statements and accompanying notes have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires the Companys management to make estimates, judgments and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. The Company continually evaluates the accounting policies and estimates it uses to prepare the consolidated financial statements. The Company bases its estimates on historical experience and assumptions believed to be reasonable under current facts and circumstances. Actual amounts and results could differ from these estimates made by management.
The majority of the Companys revenues are generated from monthly account and transaction-based fees in which revenue is recognized when the related services have been rendered. The revenues are recognized under service agreements having stipulated terms and conditions which are long-term in nature, generally three to five years, and do not require management to make significant judgments or assumptions. Given the nature of the Companys business and the applicable rules guiding revenue recognition, the Companys revenue recognition practices do not contain significant estimates that materially affect its results of operations.
The Company has reviewed the carrying value of goodwill and other intangible assets by comparing such amounts to their fair values and has determined that the carrying amounts of goodwill and other intangible assets do not exceed their respective fair values. The Company is required to perform this comparison at least annually or more frequently if circumstances indicate possible impairment. When determining fair value, the Company uses various assumptions, including projections of future cash flows. Given the significance of goodwill and other intangible asset balances, an adverse change to the fair value could result in an impairment charge, which could be material to the Companys financial statements.
The Company does not participate in, nor has it created, any off-balance sheet variable interest entities or other off-balance sheet financing, other than operating leases. In addition, the Company does not enter into any derivative financial instruments for speculative purposes and uses derivative financial instruments primarily for managing its exposure to changes in interest rates and managing its ratio of fixed to floating-rate long-term debt.
NEW ACCOUNTING PRONOUNCEMENT
In December 2004, the FASB issued SFAS No.123 (revised 2004), Share-Based Payment (SFAS 123R), that requires companies to expense the value of employee stock options, discounts on employee stock purchase plans and similar awards. Under SFAS 123R, share-based payment awards result in a cost that will be measured at fair value on the awards' grant date, based on the estimated number of awards that are expected to vest. SFAS 123R is effective for periods beginning after June 15, 2005, and applies to all outstanding and unvested share-based payment awards at the adoption date. The Company has not completed its evaluation of the impact of adopting SFAS 123R.
MARKET RISK
Market risk refers to the risk that a change in the level of one or more market prices, interest rates, indices, correlations or other market factors, such as liquidity, will result in losses for a certain financial instrument or group of financial instruments. The Company is exposed primarily to interest rate risk and market price risk on investments and borrowings. The Company actively monitors these risks through a variety of control procedures involving senior management.
The Companys Investment support services subsidiaries accept money market account deposits from customers and invest those funds in marketable securities. Substantially all of the investments are rated within the highest investment grade categories for securities. The Company's Investment support services subsidiaries utilize simulation models for measuring and monitoring interest rate risk and market value of portfolio equities. A formal Asset Liability Committee of the Company meets quarterly to review interest rate risks, capital ratios, liquidity levels, portfolio diversification, credit risk ratings and adherence to investment policies and guidelines. Substantially all of the investments at December 31, 2004 have contractual maturities of one year or less except for mortgage-backed obligations, which have an average duration of approximately three years and five months. The Company does not believe any significant changes in interest rates would have a material impact on the consolidated financial statements.
18
The Company manages its debt structure and interest rate risk through the use of fixed and floating-rate debt and through the use of interest rate swaps. The Company uses interest rate swaps to partially hedge its exposure to interest rate changes and to control its financing costs. Generally, under these swaps, the Company agrees with a counter party to exchange the difference between fixed-rate and floating-rate interest amounts based on an agreed notional amount. While changes in interest rates could decrease the Companys interest income or increase its interest expense, the Company does not believe that it has a material exposure to changes in interest rates, primarily due to approximately 60% of the Companys long-term debt having fixed interest rates as of December 31, 2004. Based on the Companys long-term debt with variable interest rates as of December 31, 2004, a 1% increase in the Companys borrowing rate would increase annual interest expense by approximately $1.9 million. Based on the controls in place, management believes the risks associated with financial instruments at December 31, 2004, will not have a material effect on the Companys consolidated financial position or 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. During 2004, the Company reclassified its reportable segments to better align with how the chief operating decision maker of the Company currently manages its businesses. The previously reported All other and corporate segment was removed as the printing and plastic card businesses included in that segment were reclassified to the Financial institution outsourcing, systems and services segment and corporate expenses were allocated to each segment based on the segments operating income as a percentage of total operating income. The Companys 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).
On December 16, 2004, the Company announced it had reached a definitive agreement to sell its securities clearing businesses to the National Financial unit of Fidelity Investments for a price of approximately $365 million. The transaction is subject to standard and customary closing conditions and is expected to close in the first quarter of 2005. In accordance with Statement of Financial Accounting Standards (SFAS) No.144, Accounting for the Impairment or Disposal of Long-Lived Assets, the financial results of the Companys securities clearing businesses are reported as discontinued operations for all periods presented and are not included in the following segment information.
The following table presents, for the period indicated, certain amounts included in the Companys consolidated statements of income, the relative percentage that those amounts represent to processing and services revenues, and the percentage change in those amounts from year to year. This information should be read along with the consolidated financial statements and notes thereto. This table and the following discussion exclude the revenues and expenses associated with customer reimbursements because management believes that it is not appropriate to include the 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 $379.2 million, $333.3 million and $290.4 million for the years ended December 31, 2004, 2003 and 2002, respectively.
Year ended December 31, (In millions) |
Percent of processing revenue Year ended December 31, |
Percent Increase (Decrease) |
||||||||||||||||||||||
2004 |
2003 |
2002 |
2004 |
2003 |
2002 |
2004 vs. 2003 |
2003 vs. 2002 |
|||||||||||||||||
Processing and services revenues: |
||||||||||||||||||||||||
Financial |
$ | 2,339.1 | $ | 2,076.4 | $ | 1,759.6 | 70 | % | 80 | % | 84 | % | 13 | % | 18 | % | ||||||||
Health |
885.9 | 399.1 | 216.1 | 26 | % | 15 | % | 10 | % | 122 | % | 85 | % | |||||||||||
Investment |
125.5 | 116.6 | 123.3 | 4 | % | 4 | % | 6 | % | 8 | % | (5 | )% | |||||||||||
TOTAL |
$ | 3,350.6 | $ | 2,592.1 | $ | 2,099.0 | 100 | % | 100 | % | 100 | % | 29 | % | 23 | % | ||||||||
Cost of revenues: |
||||||||||||||||||||||||
Salaries, commissions and payroll related costs |
$ | 1,320.8 | $ | 1,222.7 | $ | 1,053.9 | 39 | % | 47 | % | 50 | % | 8 | % | 16 | % | ||||||||
Data processing costs and equipment rentals |
212.1 | 205.6 | 153.2 | 6 | % | 8 | % | 7 | % | 3 | % | 34 | % | |||||||||||
Prescription costs |
439.6 | 55.9 | | 13 | % | 2 | % | | 686 | % | | |||||||||||||
Other operating expenses |
533.3 | 420.3 | 323.2 | 16 | % | 16 | % | 15 | % | 27 | % | 30 | % | |||||||||||
Depreciation and amortization |
185.4 | 165.8 | 134.4 | 6 | % | 6 | % | 6 | % | 12 | % | 23 | % | |||||||||||
TOTAL |
$ | 2,691.0 | $ | 2,070.3 | $ | 1,664.7 | 80 | % | 80 | % | 79 | % | 30 | % | 24 | % | ||||||||
Operating income: |
||||||||||||||||||||||||
Financial (1) |
$ | 563.6 | $ | 457.8 | $ | 383.4 | 24 | % | 22 | % | 22 | % | 23 | % | 19 | % | ||||||||
Health (1) |
75.4 | 47.5 | 32.4 | 9 | % | 12 | % | 15 | % | 59 | % | 46 | % | |||||||||||
Investment (1) |
20.6 | 16.6 | 18.5 | 16 | % | 14 | % | 15 | % | 24 | % | (10 | )% | |||||||||||
TOTAL |
$ | 659.6 | $ | 521.8 | $ | 434.3 | 20 | % | 20 | % | 21 | % | 26 | % | 20 | % | ||||||||
(1) | Percent of segment revenues is calculated as a percent of the Financial, Health and Investment segment's processing and services revenues. |
19
INTERNAL REVENUE GROWTH
Internal revenue growth percentages are measured as the increase or decrease 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 periods. 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 table sets forth the calculation of internal revenue growth percentages:
Year ended December 31, | 2004 Internal Growth% |
Year ended December 31, | 2003 Internal Growth% |
|||||||||||||||||||||||
(In millions) |
(In millions) |
|||||||||||||||||||||||||
2004 |
2003 |
Increase (Decrease) |
2003 |
2002 |
Increase (Decrease) |
|||||||||||||||||||||
Total Company |
||||||||||||||||||||||||||
Processing and services revenues |
$ | 3,350.6 | $ | 2,592.1 | $ | 758.5 | $ | 2,592.1 | $ | 2,099.0 | $ | 493.1 | ||||||||||||||
Acquired revenue from acquisitions |
456.0 | (456.0 | ) | 359.4 | (359.4 | ) | ||||||||||||||||||||
Adjusted revenues |
$ | 3,350.6 | $ | 3,048.1 | $ | 302.5 | 10 | % | $ | 2,592.1 | $ | 2,458.4 | $ | 133.7 | 5 | % | ||||||||||
By Segment: |
||||||||||||||||||||||||||
Financial |
||||||||||||||||||||||||||
Processing and services revenues |
$ | 2,339.1 | $ | 2,076.4 | $ | 262.7 | $ | 2,076.4 | $ | 1,759.6 | $ | 316.8 | ||||||||||||||
Acquired revenue from acquisitions |
206.1 | (206.1 | ) | 270.8 | (270.8 | ) | ||||||||||||||||||||
Adjusted revenues |
$ | 2,339.1 | $ | 2,282.5 | $ | 56.6 | 2 | % | $ | 2,076.4 | $ | 2,030.4 | $ | 46.0 | 2 | % | ||||||||||
Health |
||||||||||||||||||||||||||
Processing and services revenues |
$ | 885.9 | $ | 399.1 | $ | 486.9 | $ | 399.1 | $ | 216.1 | $ | 182.9 | ||||||||||||||
Acquired revenue from acquisitions |
249.9 | (249.9 | ) | 88.5 | (88.5 | ) | ||||||||||||||||||||
Adjusted revenues |
$ | 885.9 | $ | 649.0 | $ | 237.0 | 37 | % | $ | 399.1 | $ | 304.6 | $ | 94.4 | 31 | % | ||||||||||
Investment |
||||||||||||||||||||||||||
Processing and services revenues |
$ | 125.5 | $ | 116.6 | $ | 8.9 | 8 | % | $ | 116.6 | $ | 123.3 | ($ | 6.6 | ) | (5 | )% | |||||||||
PROCESSING AND SERVICES REVENUES
Total processing and services revenues increased $758.5 million, or 29%, in 2004 compared to 2003 and $493.1 million, or 23%, in 2003 compared to 2002. The internal revenue growth rate was 10% in 2004 and 5% in 2003 with the remaining growth resulting from acquisitions in the Financial and Health segments. Overall internal revenue growth was primarily derived from sales to new clients, cross-sales to existing clients and increases in transaction volumes from existing clients. The increase in the internal revenue growth rate in 2004 to 10% from 5% in 2003 was primarily driven by strong internal revenue growth in the Health segment.
The Financial segment had revenue growth of $262.7 million, or 13%, in 2004 compared to 2003 and $316.8 million, or 18%, in 2003 compared to 2002. The internal revenue growth rate in the Financial segment was 2% in both 2004 and 2003 with the remaining growth resulting from acquisitions. The Financial segment's businesses generally enter into three to five year contracts with its customers that contain early contract termination fees. The internal revenue growth rate in this segment was positively impacted by approximately 1% in 2004 compared to 2003, due to an increase of $27 million in revenue associated with one-time early contract termination and assignment fees. Approximately $13 million of the increase in one-time fees in 2004 was due to one large contract assignment fee and one contract terminated early in the contract term caused by a customer being acquired by another financial institution. The internal revenue growth rate in 2004 was negatively impacted by approximately 1% due to the loss of an item processing customer announced in 2003.
The Health segment had revenue growth of $486.9 million, or 122%, in 2004 compared to 2003 and $182.9 million, or 85%, in 2003 compared to 2002. Total revenue growth in 2004 for this segment was positively impacted by an increase of $383.7 million related to the inclusion in revenues and cost of revenues of the prescription ingredient cost in the pharmacy services businesses. The Company entered the pharmacy services business in the second quarter of 2003. The average operating margins of the Company's pharmacy services businesses are in the mid single digits. The internal revenue growth rate in this segment for 2004 was 37% and for 2003 was 31% with the remaining growth resulting from acquisitions.
Revenue in the Investment segment increased by $8.9 million, or 8%, in 2004 compared to 2003 and decreased by $6.6 million, or 5%, in 2003 compared to 2002. During 2004, new customer sales and an increase in assets under administration resulted in an increase in trust administration fees. In addition, the combination of increased investments and rising interest rates increased investment income in 2004.
COST OF REVENUES
Cost of revenues increased $620.7 million, or 30%, in 2004 compared to 2003 and $405.6 million, or 24%, in 2003 compared to 2002. As a percentage of processing and services revenues, cost of revenues were 80% in 2004 and 2003, and 79% in 2002. The make up of cost of revenues each year has been affected by business acquisitions and significantly impacted by changes in the mix of the Company's business.
As a percentage of processing and services revenues, salaries, commissions and payroll related costs were 39% in 2004, 47% in 2003 and 50% in 2002, and data processing costs and equipment rentals were 6% in 2004, 8% in 2003, and 7% in 2002. The decline in salaries, commissions and payroll related costs and data processing costs and equipment rentals as a percentage of revenue from 2003 to 2004 was primarily the result of the revenue growth of $486.9 million in the Health segment in 2004, primarily driven by the pharmacy services businesses. The pharmacy services businesses' revenue growth contributed to a significant increase of prescription costs of $383.7 million. The increase in prescription costs as a percentage of processing and services revenue in 2004 resulted in a decrease in these other expense categories as a percentage of processing and services revenue.
As a percentage of processing and services revenues, other operating expenses were 16% in 2004 and 2003, and 15% in 2002. Other operating expenses as a percentage of processing and services revenues were relatively consistent year over year as the impact of the prescription ingredient costs mentioned previously was offset by the impact of acquisitions in the Financial segment, which have a higher proportion of other operating expenses, primarily third party contractor costs, than other expense categories.
20
OPERATING INCOME
Operating income increased $137.7 million, or 26%, in 2004 compared to 2003 and $87.5 million, or 20%, in 2003 compared to 2002. The operating income increase in 2004 compared to 2003 was primarily derived from the Financial segment which increased operating income $105.9 million in 2004 compared to 2003 and the Health segment which increased operating income $27.9 million in 2004 compared to 2003.
Operating margins in the Financial segment were 24% in 2004 and 22% in 2003 and 2002. The increase in operating margins in 2004 compared to 2003 in the Financial segment was primarily due to continued operating efficiencies and the impact of increased one-time termination and assignment fees of $27 million which increased operating margins by approximately 1%.
Operating margins in the Health segment were 9% in 2004, 12% in 2003 and 15% in 2002. The decrease in operating margins in the Health segment in 2004 compared to 2003 and to 2002 was due to the significant growth in the pharmacy services businesses, which generate operating margins in the mid single digits as previously discussed.
Operating margins in the Investment segment were 16% in 2004, 14% in 2003 and 15% in 2002. Operating margins increased by 2% over 2003 primarily due to increased trust administration fees and investment income, and the completion of the Investment support services operations consolidation to one technology platform and into one location.
DISCONTINUED OPERATIONS
The net loss from discontinued operations was $17.3 million for the year ended December 31, 2004, or $(0.09) per share, compared to net income from discontinued operations of $6.2 million, or $0.03 per share, for the year ended December 31, 2003. The increased loss in 2004 was primarily due to a charge of $16 million, or $(0.07) per share, related to inquiries from the Securities Exchange Commission as part of its industry-wide review of mutual fund practices, including market timing and late trading. The Companys broker-dealer subsidiary, Fiserv Securities, Inc. ("FSI"), has engaged in settlement discussions with the SEC as a result of an SEC investigation of FSI with respect to these matters. A portion of any settlement amount with the SEC may be non-deductible for tax purposes. While no settlement with the SEC has been reached and no assurance can be given that these matters will be settled consistent with the amounts reserved, the Company does not anticipate any further material liability arising out of the SEC investigation (see Notes 3 and 7).
INCOME TAX PROVISION
The effective income tax rate on continuing operations was 38.4% in 2004 and 39.0% in 2003 and 2002. The decrease in the 2004 tax rate of 0.6% was primarily due to tax benefits associated with recently enacted federal tax law changes that impacted the utilization of foreign tax credits. The income tax rate on continuing operations for 2005 is expected to be 38.7%.
NET INCOME PER SHARE -DILUTED
Net income per share-diluted for 2004 was $1.91 compared to $1.61 in 2003 and $1.37 in 2002. Net income per share-diluted from continuing operations for 2004 was $2.00 compared to $1.58 in 2003 and $1.33 in 2002. The $2.00 in net income from continuing operations per share for 2004 was positively impacted by approximately $0.08 per share, compared to 2003, due to an increase of $27 million in one-time early termination and assignment fees in our Financial segment discussed previously.
The Companys growth has been accomplished, to a significant degree, through the acquisition of businesses that are complementary to its operations. Management believes that a number of acquisition candidates are available that would further enhance the Companys competitive position and plans to pursue them vigorously. Management is engaged in an ongoing program to reduce expenses related to acquisitions by eliminating operating redundancies. The Companys approach has been to move slowly in achieving this goal in order to minimize the amount of disruption experienced by its clients and the potential loss of clients due to this program.
LIQUIDITY AND CAPITAL RESOURCES
Free cash flow is measured as net cash provided by operating activities from continuing operations less capital expenditures including capitalization of software costs for external customers, as reported in the Companys 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 during the years ended December 31:
(In millions) | 2004 |
2003 |
2002 |
|||||||||
Net cash provided by operating activities from continuing operations |
$ | 698.4 | $ | 595.7 | $ | 481.1 | ||||||
Capital expenditures, including capitalization of software costs for external customers |
(161.1 | ) | (139.1 | ) | (137.1 | ) | ||||||
Free cash flow |
$ | 537.3 | $ | 456.6 | $ | 344.0 | ||||||
Free cash flow increased by $80.7 million, or 18%, in 2004 compared to 2003 primarily due to an increase in net income. In 2004, the Company primarily used its free cash flow of $537.3 million to repay long-term debt of $210.2 million, to repurchase $64.3 million of stock and to build cash balances.
Long-term debt includes $195.0 million borrowed under the Companys $700.0 million credit and commercial paper facility, 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. The Company must, among other requirements, maintain a minimum net worth of $1.8 billion as of December 31, 2004 and limit its total debt to no more than three and one-half times the Companys earnings before interest, taxes, depreciation and amortization. At December 31, 2004, the Company had $505.3 million of long-term debt, while shareholders equity was $2.6 billion. The Company was in compliance with all covenants throughout 2004.
21
At December 31, 2004, the Company had operating lease commitments for office facilities and equipment aggregating $411.3 million, of which $85.7 million will be incurred in 2005. The Company believes that its cash flow from operations together with other available sources of funds will be adequate to meet its operating requirements, debt repayments, contingent payments in connection with business acquisitions and ordinary capital spending needs. At December 31, 2004, the Company had $503.8 million available for borrowing and $516.1 million in cash and cash equivalents. In the event that the Company makes significant future acquisitions, however, it may raise funds through additional borrowings or the issuance of securities.
The Companys current policy is to retain earnings to support future business opportunities, rather than to pay dividends. During 1999, the Companys Board of Directors authorized the repurchase of up to 4.9 million shares of the Companys common stock, which the Company fully utilized by December 31, 2004. In 2004, the Companys Board of Directors authorized the repurchase of an additional 8.3 million shares of the Companys common stock. Shares purchased under the authorization are made through open market transactions as market conditions warrant. Shares acquired have historically been held for issuance in connection with acquisitions and employee stock option and purchase plans. During 2004, the Company repurchased 1.7 million shares for $64.3 million to complete the 1999 Board authorization. As of December 31, 2004, approximately 8.3 million shares from the 2004 authorization remained available under the repurchase authorization.
OFF-BALANCE SHEET ARRANGEMENTS AND CONTRACTUAL OBLIGATIONS
The Company does not have any material off-balance sheet arrangements. The following table details certain of the Companys contractual cash obligations at December 31, 2004:
(In millions) | Total |
Less than 1 year |
1-3 years |
3-5 years |
More than 5 years | ||||||||||
Long-term debt |
$ | 505.3 | $ | 47.5 | $ | 7.8 | $ | 450.1 | | ||||||
Minimum operating lease payments |
411.3 | 85.7 | 133.7 | 86.1 | $ | 105.8 | |||||||||
Short-term debt |
100.0 | 100.0 | | | | ||||||||||
Purchase obligations |
9.1 | 4.9 | 2.4 | 1.8 | | ||||||||||
Total |
$ | 1,025.6 | $ | 238.1 | $ | 143.9 | $ | 538.0 | $ | 105.8 | |||||
22
SELECTED FINANCIAL DATA
The following data, which has been affected by acquisitions, should be read in conjunction with the consolidated financial statements and related notes thereto included elsewhere in this Annual Report.
(In thousands, except per share data) Years ended December 31, |
2004 |
2003 |
2002 |
2001 |
2000 | |||||||||||
Processing and services revenues |
$ | 3,350,595 | $ | 2,592,115 | $ | 2,099,038 | $ | 1,761,625 | $ | 1,473,123 | ||||||
Income from continuing operations |
394,898 | 308,823 | 259,331 | 198,676 | 130,224 | |||||||||||
Income (loss) from discontinued operations |
(17,256 | ) | 6,189 | 6,806 | 9,541 | 46,797 | ||||||||||
Net income |
377,642 | 315,012 | 266,137 | 208,217 | 177,021 | |||||||||||
Basic net income (loss) per share: |
||||||||||||||||
Continuing operations |
$ | 2.03 | $ | 1.60 | $ | 1.36 | $ | 1.06 | $ | 0.71 | ||||||
Discontinued operations |
(0.09 | ) | 0.03 | 0.04 | 0.05 | 0.25 | ||||||||||
TOTAL |
$ | 1.94 | $ | 1.63 | $ | 1.39 | $ | 1.11 | $ | 0.96 | ||||||
Diluted net income (loss) per share: |
||||||||||||||||
Continuing operations |
$ | 2.00 | $ | 1.58 | $ | 1.33 | $ | 1.04 | $ | 0.69 | ||||||
Discontinued operations |
(0.09 | ) | 0.03 | 0.03 | 0.05 | 0.24 | ||||||||||
TOTAL |
$ | 1.91 | $ | 1.61 | $ | 1.37 | $ | 1.09 | $ | 0.93 | ||||||
Total assets |
$ | 8,383,349 | $ | 7,214,175 | $ | 6,438,705 | $ | 5,322,242 | $ | 5,586,320 | ||||||
Long-term debt |
505,327 | 699,116 | 482,824 | 343,093 | 334,958 | |||||||||||
Shareholders equity |
2,564,422 | 2,199,808 | 1,827,669 | 1,604,826 | 1,252,072 |
Note: The above information excludes the revenues and expenses associated with customer reimbursements recorded in accordance with EITF No. 01-14. Operating results have been restated to include all activities related to the securities clearing businesses in discontinued operations for all periods presented.
MARKET PRICE INFORMATION
The following information relates to the high and low sales price of the Company's common stock, which is traded on the Nasdaq Stock Market under the symbol FISV.
2004 |
2003 | |||||||||||
Quarter Ended |
High |
Low |
High |
Low | ||||||||
March 31 |
$ | 40.61 | $ | 35.02 | $ | 36.25 | $ | 27.23 | ||||
June 30 |
41.00 | 34.10 | 37.51 | 28.64 | ||||||||
September 30 |
39.05 | 32.20 | 40.77 | 35.30 | ||||||||
December 31 |
41.01 | 33.28 | 40.00 | 32.87 |
At December 31, 2004, the Companys common stock was held by 11,169 shareholders of record. It is estimated that an additional 55,800 shareholders own the Companys stock through nominee or street name accounts with brokers. The closing sale price for the Companys stock on January 31, 2005, was $38.25 per share.
23
QUARTERLY FINANCIAL INFORMATION (Unaudited)
(In thousands, except per share data) | Quarters |
Total |
||||||||||||||||||
2004 | First |
Second |
Third |
Fourth |
||||||||||||||||
Processing and services revenues |
$ | 811,556 | $ | 829,842 | $ | 843,095 | $ | 866,102 | $ | 3,350,595 | ||||||||||
Cost of revenues |
650,218 | 667,930 | 669,397 | 703,490 | 2,691,035 | |||||||||||||||
Operating income |
161,338 | 161,912 | 173,698 | 162,612 | 659,560 | |||||||||||||||
Interest expense - net |
(4,732 | ) | (4,486 | ) | (4,395 | ) | (4,581 | ) | (18,194 | ) | ||||||||||
Income from continuing operations before income taxes |
156,606 | 157,426 | 169,303 | 158,031 | 641,366 | |||||||||||||||
Income tax provision |
60,897 | 61,331 | 65,008 | 59,232 | 246,468 | |||||||||||||||
Income from continuing operations |
95,709 | 96,095 | 104,295 | 98,799 | 394,898 | |||||||||||||||
Loss from discontinued operations, net of tax |
(2,911 | ) | (1,061 | ) | (11,938 | ) | (1,346 | ) | (17,256 | ) | ||||||||||
Net income |
$ | 92,798 | $ | 95,034 | $ | 92,357 | $ | 97,453 | $ | 377,642 | ||||||||||
Basic net income (loss) per share: |
||||||||||||||||||||
Continuing operations |
$ | 0.49 | $ | 0.49 | $ | 0.53 | $ | 0.51 | $ | 2.03 | ||||||||||
Discontinued operations |
(0.01 | ) | (0.01 | ) | (0.06 | ) | (0.01 | ) | (0.09 | ) | ||||||||||
TOTAL |
$ | 0.48 | $ | 0.49 | $ | 0.47 | $ | 0.50 | $ | 1.94 | ||||||||||
Diluted net income (loss) per share: |
||||||||||||||||||||
Continuing operations |
$ | 0.49 | $ | 0.49 | $ | 0.53 | $ | 0.50 | $ | 2.00 | ||||||||||
Discontinued operations |
(0.01 | ) | (0.01 | ) | (0.06 | ) | (0.01 | ) | (0.09 | ) | ||||||||||
TOTAL |
$ | 0.47 | $ | 0.48 | $ | 0.47 | $ | 0.49 | $ | 1.91 | ||||||||||
(In thousands, except per share data) | Quarters |
Total |
||||||||||||||||||
2003 | First |
Second |
Third |
Fourth |
||||||||||||||||
Processing and services revenues |
$ | 580,578 | $ | 616,816 | $ | 673,935 | $ | 720,786 | $ | 2,592,115 | ||||||||||
Cost of revenues |
457,123 | 487,178 | 541,109 | 584,883 | 2,070,293 | |||||||||||||||
Operating income |
123,455 | 129,638 | 132,826 | 135,903 | 521,822 | |||||||||||||||
Interest expense - net |
(2,977 | ) | (3,474 | ) | (4,472 | ) | (4,632 | ) | (15,555 | ) | ||||||||||
Income from continuing operations before income taxes |
120,478 | 126,164 | 128,354 | 131,271 | 506,267 | |||||||||||||||
Income tax provision |
46,987 | 49,203 | 50,058 | 51,196 | 197,444 | |||||||||||||||
Income from continuing operations |
73,491 | 76,961 | 78,296 | 80,075 | 308,823 | |||||||||||||||
Income from discontinued operations, net of tax |
697 | 1,477 | 2,116 | 1,899 | 6,189 | |||||||||||||||
Net income |
$ | 74,188 | $ | 78,438 | $ | 80,412 | $ | 81,974 | $ | 315,012 | ||||||||||
Basic net income per share: |
||||||||||||||||||||
Continuing operations |
$ | 0.38 | $ | 0.40 | $ | 0.40 | $ | 0.41 | $ | 1.60 | ||||||||||
Discontinued operations |
| 0.01 | 0.01 | 0.01 | 0.03 | |||||||||||||||
TOTAL |
$ | 0.39 | $ | 0.41 | $ | 0.42 | $ | 0.42 | $ | 1.63 | ||||||||||
Diluted net income per share: |
||||||||||||||||||||
Continuing operations |
$ | 0.38 | $ | 0.39 | $ | 0.40 | $ | 0.41 | $ | 1.58 | ||||||||||
Discontinued operations |
| 0.01 | 0.01 | 0.01 | 0.03 | |||||||||||||||
TOTAL |
$ | 0.38 | $ | 0.40 | $ | 0.41 | $ | 0.42 | $ | 1.61 | ||||||||||
Note: The above information excludes the revenues and expenses associated with customer reimbursements recorded in accordance with EITF No. 01-14. Results have been restated to include all activities related to the securities clearing businesses in discontinued operations for all periods presented.
24
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Shareholders and Directors of Fiserv, Inc.
We have audited the accompanying consolidated balance sheets of Fiserv, Inc. and subsidiaries (the Company) as of December 31, 2004 and 2003, and the related consolidated statements of income, shareholders equity and cash flows for each of the three years in the period ended December 31, 2004. These financial statements are the responsibility of the Companys management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Fiserv, Inc. and subsidiaries as of December 31, 2004 and 2003, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2004, in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of the Companys internal control over financial reporting as of December 31, 2004, based on the criteria established in Internal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 7, 2005 expressed an unqualified opinion on managements assessment of the Company's internal control over financial reporting and an unqualified opinion on the effectiveness of the Companys internal control over financial reporting.
/s/ Deloitte & Touche LLP |
Deloitte & Touche LLP Milwaukee, Wisconsin February 7, 2005 |
25
MANAGEMENTS ANNUAL REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rule 13a-15(f) under the Securities Exchange Act of 1934. Our internal control over financial reporting is designed 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.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to risk that controls may become inadequate because of changes in conditions.
Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2004. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control Integrated Framework. Based on our managements assessment, our management believes that, as of December 31, 2004, our internal control over financial reporting was effective based on those criteria.
Our independent registered public accounting firm has issued their attestation report on our assessment of our internal control over financial reporting.
26
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Shareholders and Directors of Fiserv, Inc.
We have audited managements assessment, included in the accompanying Managements Annual Report on Internal Control over Financial Reporting, that Fiserv, Inc. and subsidiaries (the Company) maintained effective control over financial reporting as of December 31, 2004, based on criteria established in Internal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Companys management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management's assessment and an opinion on the effectiveness of the Companys internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating managements assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinions.
A companys internal control over financial reporting is a process designed by, or under the supervision of, the companys principal executive and principal financial officers, or persons performing similar functions, and effected by the companys board of directors, management, and other personnel 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. A companys internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the companys assets that could have a material effect on the financial statements.
Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, managements assessment that the Company maintained effective internal control over financial reporting as of December 31, 2004, is fairly stated, in all material respects, based on the criteria established in Internal ControlIntegrated Framework issued by the COSO. Also, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2004, based on the criteria established in Internal ControlIntegrated Framework issued by the COSO.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements as of and for the year ended December 31, 2004 of the Company and our report dated February 7, 2005 expressed an unqualified opinion on those financial statements.
/s/ Deloitte & Touche LLP |
Deloitte & Touche LLP Milwaukee, Wisconsin February 7, 2005 |
27