FIS Q1 2020 Form 10-Q Summary
Reporting period: Three months ended March 31, 2020. Unaudited results are compared with Q1 2019. The July 2019 Worldpay acquisition materially changed the company’s size and business mix, so reported year-over-year growth is not directly comparable to organic growth.
Key financial results
| Metric | Q1 2020 | Q1 2019 | Change / context |
|---|---|---|---|
| Revenue | $3.078 billion | $2.057 billion | Up 50%, primarily from Worldpay; COVID-19 and foreign exchange were offsets. |
| Gross profit / margin | $989 million / 32% | $676 million / 33% | Margin declined, primarily due to acquired intangible amortization. |
| Operating income / margin | $108 million / 4% | $315 million / 15% | Down 66%; SG&A rose substantially, including Worldpay costs and acquisition/integration costs. |
| Net earnings attributable to FIS common stockholders | $15 million | $148 million | Diluted EPS was $0.02 versus $0.45. |
| Adjusted EBITDA | $1.247 billion | $729 million | Segment measure; includes $225 million of acquisition, integration and other costs in Corporate and Other. |
| Operating cash flow | $383 million | $294 million | Increase attributed mainly to Worldpay, partly offset by settlement timing, lower earnings and integration costs. |
| Capital expenditures | $306 million | $145 million | Management’s stated investment amounts exclude certain financing obligations. |
| Debt | $20.4 billion | — | Debt including current portion, net of capitalized debt issuance costs, as of March 31. |
| Available liquidity | $3.018 billion | — | $1.373 billion cash and cash equivalents plus $1.645 billion revolver capacity. |
Cash and cash equivalents on the balance sheet were $1.373 billion; the cash-flow statement’s $3.440 billion ending balance includes restricted cash. The company paid $216 million in dividends during the quarter. Its quarterly dividend was $0.35 per share, and management said it currently expected to continue quarterly dividends, subject to board discretion and other factors.
Segments and material changes
- Merchant Solutions: Revenue of $935 million and adjusted EBITDA of $422 million, substantially reflecting Worldpay. Processing volumes were adversely affected by COVID-19.
- Banking Solutions: Revenue of $1.462 billion, up 6.5%; adjusted EBITDA was $614 million. Growth included Worldpay, network volumes and digital banking, partly offset by pandemic-related declines in issuer processing, debit network and account transactions.
- Capital Market Solutions: Revenue of $631 million, up 10.3%; adjusted EBITDA was $280 million. Growth included Virtus, managed services, brokerage volumes and license execution.
- Reported results include higher acquired-intangible amortization and acquisition-related expenses. Q1 net earnings also reflect a tax benefit; the reported effective tax rate was 273% because pretax earnings were near zero and negative.
- Foreign-currency translation adjustments reduced other comprehensive earnings by $215 million, largely reflecting currency movements; the company reported a $535 million net-of-tax gain on net investment hedges in that period.
Outlook, risks and contingencies
- Management said pandemic-related declines in payments volumes and transaction activity, particularly in travel, hospitality, restaurants and retail, were likely to adversely affect results in Q2 2020 and possibly beyond. The duration and magnitude were uncertain; no specific earnings or revenue guidance is provided in the filing text.
- FIS extended higher-than-usual credit to some merchant clients for settlement-related payments and warned of possible losses from merchant defaults and chargebacks. It said these exposures had not materially affected Q1 liquidity or results, but a reasonable estimate of potential chargeback losses could not be made.
- The company borrowed on its revolving facility during March when commercial paper markets were less liquid, and subsequently began repaying some revolver borrowings with new commercial paper. It expects to extend its target deleveraging timeline into 2021 because of COVID-19 impacts.
- Management expected cash, operating cash flow and available borrowing capacity to cover operating requirements, capital expenditures and mandatory debt service for the next 12 months. It cautioned that COVID-19 could affect liquidity, debt covenant compliance, dividends and goodwill valuations.
- Interim testing found no goodwill impairment as of March 31, but management said a prolonged downturn could lead to impairment, particularly in Merchant Solutions.
- Contingencies include a Reliance Trust class action in which plaintiffs sought approximately $127 million; FIS recorded no liability and said it could not estimate a loss range. Brazilian tax claims present potential exposure of approximately $64 million; no liability was recorded. The balance sheet includes a $563 million liability related to the Worldpay tax receivable agreement.
- FIS reported Worldpay integration synergies were ahead of schedule at quarter-end. It also described pandemic-related operating and cyber risks, including service continuity, merchant failures, fraud, and delays in client implementations.
Important facts for investors to verify
- How much of reported revenue and adjusted EBITDA growth reflects Worldpay and Virtus versus organic performance, and how pandemic-driven volume declines evolved after March.
- Merchant credit exposure, settlement collections and chargeback losses, including any subsequent disclosures or changes in loss estimates.
- Debt and liquidity trends, the revised deleveraging timetable, commercial paper access and compliance with debt covenants.
- Whether the $0.35 quarterly dividend continues and whether pandemic impacts alter capital allocation plans.
- Progress on Worldpay integration and synergies, acquisition accounting estimates, and potential goodwill impairment.
- Developments in the Reliance Trust litigation, Brazilian tax claims and Worldpay tax receivable agreement obligations.