Fiserv - 10-Q quarterly report FY

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D. C. 20549

FORM 10-Q

For the quarterly period ended September 30, 2004

or

For the transition period from              to            

Commission file number 0-14948

FISERV, INC.

(Exact name of Registrant as specified in its charter)

(262) 879-5000

(Registrant’s telephone number, including area code)

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

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

As of October 18, 2004, there were 195,589,962 shares of common stock, $.01 par value, of the Registrant outstanding.

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FISERV, INC. AND SUBSIDIARIES

INDEX

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PART I. FINANCIAL INFORMATION

ITEM I. FINANCIAL STATEMENTS

FISERV, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(In thousands, except per share amounts)

(Unaudited)

See notes to condensed consolidated financial statements.

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FISERV, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Dollars in thousands)

(Unaudited)

See notes to condensed consolidated financial statements.

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FISERV, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in thousands)

(Unaudited)

See notes to condensed consolidated financial statements.

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FISERV, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. Principles of Consolidation

The condensed consolidated financial statements for the three and nine month periods ended September 30, 2004 and 2003 are unaudited. In the opinion of management, all adjustments necessary for a fair presentation of such condensed consolidated financial statements have been included. Such adjustments consisted only of normal recurring items. Interim results are not necessarily indicative of results for a full year. The financial statements and notes are presented as permitted by Form 10-Q, and do not contain certain information included in the annual consolidated financial statements and notes of Fiserv, Inc. and subsidiaries (the “Company”). See the Company’s results by business segment in Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Certain amounts reported in prior periods have been reclassified to conform to the 2004 presentation.

2. 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 any compensation expense in the condensed consolidated financial statements for its stock-based compensation plans. The following table illustrates the effect on net income and net income per share had compensation expense been recognized consistent with the fair value provisions of Statement of Financial Accounting Standards (“SFAS”) No. 123, “Accounting for Stock-Based Compensation”. 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. Stock options are typically granted in the first quarter of the year, generally vest 20% on the date of grant and 20% each year thereafter and expire 10 years from the date of the award. As a result, the expense that would be recognized under SFAS No. 123 during the first quarter is higher than the expense for the remaining quarters.

3. Shares Used in Computing Net Income Per Share

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

4. Fiserv Securities, Inc. Regulatory Matters

During 2004, the Company’s broker-dealer subsidiary, Fiserv Securities, Inc. (“FSI”), has been responding 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 an additional $10 million charge in the third quarter of 2004, or $0.05 per share, to bring its total reserve recorded with respect to these matters to $16 million. 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, FSI does not anticipate any further material liability arising out of the SEC investigation.

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5. Comprehensive Income

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

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

Results of Operations

The Company is an independent provider of information management systems and services to the financial industry including transaction processing, business process outsourcing and software and systems solutions. The Company’s operations have been classified into four business segments: Financial outsourcing, systems and services (“Financial”); Health plan management services (“Health”); Investment support and securities processing services (“Investment Services”); and All other and corporate (“Other”).

The following tables and discussion exclude the revenues and expenses associated with customer reimbursements because management believes that it is not appropriate to include customer reimbursements in analyzing the current performance of the Company as these balances offset in revenues and expenses with no impact on operating income and these amounts are not an indicator of current or future business trends. Customer reimbursements, which primarily consist of pass-through expenses such as postage and data communication costs, were $91.8 million and $84.0 million for the three month periods ended September 30, 2004 and 2003 and $279.4 million and $246.2 million for the nine month periods ended September 30, 2004 and 2003, respectively.

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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 for the comparable prior year period. Internal revenue growth percentage is a non-GAAP financial measure that the Company believes is useful to investors because it provides an alternative to measure revenue growth excluding the impact of acquired revenues. The following tables set forth the calculation of internal revenue growth for the three and nine month periods ended September 30, 2004:

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Processing and Services Revenues

Total processing and services revenues increased $164.4 million, or 23%, in the third quarter of 2004 compared to 2003 and $612.1 million, or 31%, in the first nine months of 2004 compared to 2003. Internal revenue growth for the third quarter of 2004 was 7% and for the first nine months of 2004 was 9% with the remaining growth resulting from acquisitions. 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 2004 internal revenue growth rate was primarily driven by strong internal revenue growth in the Health segment’s pharmacy services businesses.

The Financial segment had positive revenue growth of $49.1 million, or 10%, in the third quarter of 2004 compared to 2003 and $215.9 million, or 15%, in the first nine months of 2004 compared to 2003 primarily resulting from acquisitions. This segment’s 2004 third quarter internal revenue growth rate of 1% was negatively impacted by approximately 3% primarily due to the combination of the loss of an item processing customer announced in 2003, and a decline in mortgage loan origination volumes and overall weakness in the automobile leasing market in 2004 compared to 2003 impacting processing volumes in the Company’s Lending division. Also, this segment’s internal revenue growth rate for the third quarter was positively impacted by 2% due to revenue associated with customer contractual termination and assignment fees that increased by $10.7 million over the prior year comparable period.

The Health segment had positive revenue growth of $112.2 million, or 100%, in the third quarter of 2004 compared to 2003 and $374.7 million, or 137%, in the first nine months of 2004 compared to 2003. $287.0 million of the total revenue growth for the first nine months of 2004 compared to 2003 for this segment was due to the inclusion in revenues and cost of revenues of the prescription ingredient cost related to the pharmacy services businesses. The Company entered the pharmacy services business in the second quarter of 2003 and the average operating margins of these businesses are in the mid single digits. The internal revenue growth rate in this segment for the third quarter of 2004 was 28% and for the first nine months of 2004 was 39% and the remaining growth resulted from acquisitions.

Revenues in the Investment Services segment decreased by $1.2 million, or 2%, in the third quarter of 2004 compared to 2003 and increased $5.1 million, or 3%, in the first nine months of 2004 compared to 2003.

Revenues in the Other segment increased by $4.3 million, or 18%, in the third quarter of 2004 compared to 2003 and $16.4 million, or 23%, in the first nine months of 2004 compared to 2003 primarily due to strong internal revenue growth in the Company’s printing and plastic card service operation through a combination of new sales and cross sales to existing customers.

Cost of Revenues

Total cost of revenues increased $139.9 million, or 25%, in the third quarter of 2004 compared to 2003 and $527.2 million, or 34%, in the first nine months of 2004 compared to 2003. As a percent of processing and services revenues, cost of revenues were 81% for the first nine months of 2004 compared to 80% in 2003. The components of cost of revenues in 2004 compared to the prior year have primarily been affected by changes in the mix of the Company’s businesses due to acquisitions completed in 2003. These 2003 acquisitions resulted in a significant increase in 2004 prescription costs and an increase in other operating expenses rather than salaries or data processing expenses due to the nature of their businesses. Other operating expenses were also higher in 2004 due to the $16 million reserve recorded in the Investment Services segment as discussed in Note 4 to the financial statements.

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Operating Income

Operating income increased $24.4 million, or 18%, in the third quarter of 2004 compared to 2003 and $84.9 million, or 22%, in the first nine months of 2004 compared to 2003. The operating income increases were primarily derived from the Financial and Health segments.

The increase in operating income in the Financial segment was $29.4 million, or 25%, in the third quarter of 2004 compared to 2003 and $78.8 million, or 23%, in the first nine months of 2004 compared to 2003. In 2004, the Financial segment’s year to date operating results continued to benefit from strong revenue growth of 15% and an operating margin of 26%. In the third quarter of 2004, the operating margin for this segment increased from 23% in 2003 to 27% in 2004 primarily due to continued operating efficiencies and the impact of the customer contractual termination and assignment fees discussed above.

The increase in the Health segment’s operating income was $7.2 million, or 55%, in the third quarter of 2004 compared to 2003 and $22.3 million, or 62%, in the first nine months of 2004 compared to 2003 due to strong revenue growth, partially offset by a decrease in operating margins. Operating margins decreased from 13% in the first nine months of 2003 to 9% in 2004 due primarily to lower operating margins associated with the pharmacy services businesses discussed previously.

The Investment Services segment’s operating income decreased by $13.4 million in the third quarter of 2004 compared to 2003 and decreased $23.7 million in the first nine months of 2004 compared to 2003. During 2004, the Company’s broker-dealer subsidiary, Fiserv Securities, Inc. (“FSI”), has been responding 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 an additional $10 million charge in the third quarter of 2004, or $0.05 per share, to bring its total reserve recorded with respect to these matters to $16 million. 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, FSI does not anticipate any further material liability arising out of the SEC investigation.

Income Tax Provision

The effective year to date income tax rate was 39.6% in 2004 and 39.0% in 2003. The slightly higher effective income tax rate in 2004 was due to the non-deductibility of a portion of the $16 million reserve described in Note 4 to the financial statements.

Net Income Per Share - Diluted

Net income per share-diluted for the third quarter was $0.47 in 2004 compared to $0.41 in 2003. Net income per share-diluted of $0.47 for the third quarter of 2004 was positively impacted by an increase in customer contractual termination and assignment fees of $0.03 per share compared to the prior year period and negatively impacted by $0.05 per share for the charge described in Note 4 to the financial statements. Net income per share-diluted for the first nine months of 2004 was $1.42 compared to $1.19 in the comparable 2003 period.

Liquidity and Capital Resources

Free cash flow is measured as net cash provided by operating activities before changes in securities processing receivables and payables less capital expenditures including capitalization of software costs for external customers, as reported in the Company’s condensed consolidated statements of cash flows. As the changes in securities processing receivables and payables are generally offset by changes in short-term borrowings and investments, which are included in financing and investing activities, management believes it is more meaningful to analyze changes in operating cash flows before the changes in securities processing receivables and payables. 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:

Free cash flow increased by $75.5 million, or 24%, in the first nine months of 2004 compared to 2003 primarily due to an increase in net income of $47.2 million, an increase of $19.3 million in depreciation and amortization, and a decrease in capital expenditures of $9.2 million. The Company’s working capital changes, excluding securities processing receivables and payables, had a positive impact on free cash flow of $39.7 million in 2004 compared to $49.0 million in 2003. In 2004, the Company primarily used its free cash flow to repay long-term debt of $209.8 million. In addition, gross software development costs for external customers capitalized in the first nine months of 2004 were $35.6 million, offset by associated amortization of $43.6 million.

Effective March 31, 2004, the Company entered into a new credit facility to replace its existing credit facility that was due in May of 2004. The new credit facility totaling $700.0 million is comprised of a $465.3 million five-year revolving credit facility due in 2009 and a $234.7 million 364-day revolving credit facility which is renewable annually through 2009. Long-term debt includes $187.4 million borrowed under the credit facility at September 30, 2004. The Company must, among other requirements, maintain a minimum net worth of $1.8 billion as of September 30, 2004 and limit its total debt to no more than three and one-half times the Company’s earnings before interest, taxes, depreciation and amortization. At September 30, 2004, the Company had $490.5 million of long-term debt, while shareholders’ equity was $2.5 billion. The Company was in compliance with all covenants as of September 30, 2004.

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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. In the event the Company makes significant future acquisitions, however, it may raise funds through additional borrowings or the issuance of securities.

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

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

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company’s quantitative and qualitative disclosures about market risk are incorporated by reference to Item 7A of the Company’s Annual Report on Form 10-K for the year ended December 31, 2003 and have not materially changed since that report was filed.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of disclosure controls and procedures.

In accordance with Rule 13a-15(b) of the Securities Exchange Act of 1934 (the “Exchange Act”), the Company’s management evaluated, with the participation of the Company’s management, including the Company’s President and Chief Executive Officer and Senior Executive Vice President and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-14(c) and 15d-14(c) under the Exchange Act) as of September 30, 2004. Based upon their evaluation of these disclosure controls and procedures, the President and Chief Executive Officer and the Senior Executive Vice President and Chief Financial Officer concluded that the disclosure controls and procedures were effective as of September 30, 2004 to ensure that material information relating to the Company, including its consolidated subsidiaries, was made known to them by others within those entities, particularly during the period in which this quarterly report on Form 10-Q was being prepared.

Changes in internal controls over financial reporting.

There was no change in the Company’s internal control over financial reporting that occurred during the quarter ended September 30, 2004 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

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PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

See Note 4 to the Condensed Consolidated Financial Statements for a discussion of inquiries and settlement discussions with the Securities and Exchange Commission regarding Fiserv Securities, Inc.

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

In 1999, the Company’s Board of Directors authorized the repurchase of up to 4,875,000 shares of the Company’s common stock. The Company did not repurchase any shares under the authorization during the quarter ended September 30, 2004. As of September 30, 2004, the Company had authority to repurchase 1,676,000 shares under that program. The repurchase authorization does not expire.

ITEM 6. EXHIBITS

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

SIGNATURES

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

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EXHIBIT INDEX

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