FIS Form 10-Q Summary
Reporting period: Third quarter and nine months ended September 30, 2017. Unaudited results are compared with the corresponding 2016 periods. FIS provides financial technology, processing, payments, and related services through Integrated Financial Solutions (IFS), Global Financial Solutions (GFS), and Corporate and Other.
Financial results
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Revenue | $2.198 billion | $2.309 billion | $6.794 billion | $6.795 billion |
| Gross profit / margin | $715 million / 32.5% | $782 million / 33.9% | $2.117 billion / 31.2% | $2.115 billion / 31.1% |
| Operating income / margin | $388 million / 17.7% | $398 million / 17.2% | $1.007 billion / 14.8% | $865 million / 12.7% |
| Net earnings attributable to FIS common stockholders | $61 million | $185 million | $331 million | $361 million |
| Diluted EPS | $0.18 | $0.56 | $0.99 | $1.10 |
| Adjusted EBITDA | $760 million | $766 million | $2.187 billion | $2.099 billion |
Cash flow: Operating cash flow was $1.079 billion for the first nine months, versus $1.342 billion in 2016. FIS attributed the decline primarily to income taxes paid on the gain from the PS&E sale. Cash used for property and equipment and software additions was $448 million, excluding capital leases. Investing cash flow was positive $856 million, including $1.307 billion of business-sale proceeds; financing cash flow was negative $1.933 billion. Cash and equivalents ended the period at $720 million.
Debt and liquidity: Debt was approximately $9.1 billion, including current maturities, and cash was $720 million. The $3.0 billion revolving facility had $568 million outstanding and $2.425 billion of remaining borrowing capacity. Management said cash plus operating cash flow should cover operating needs, capital expenditures, and mandatory debt service over the next 12 months. Approximately $518 million of cash was held by foreign entities and generally could be subject to U.S. tax upon repatriation. Quarterly dividends were $0.29 per share; a $4 billion share-repurchase authorization runs through December 31, 2020.
Changes and operating performance
- Q3 revenue declined 4.8%, largely reflecting the sale of PS&E earlier in 2017 and the July sale of a majority stake in the Capco and risk-and-compliance consulting businesses. Nine-month revenue was essentially flat year over year.
- Q3 operating income was slightly lower, while nine-month operating income rose 16%. Management cited cost management, integration savings, and higher-margin item-processing solutions; gross margin remained pressured by acquired intangible amortization.
- Q3 earnings fell sharply, with diluted EPS at $0.18 versus $0.56. The period included substantial debt-tender and divestiture-related charges. Nine-month earnings also included these items and the PS&E gain.
- IFS revenue grew 0.5% in Q3 and 1.5% year to date; adjusted EBITDA increased 1.1% and 3.3%, respectively. GFS revenue declined 6.6% in Q3, mainly from the consulting divestiture, but adjusted EBITDA rose 4.7%; year-to-date GFS adjusted EBITDA rose 10.6%. Corporate and Other adjusted EBITDA losses widened.
- FIS received approximately $469 million in cash for its majority-stake sale of the consulting businesses and retained a 40% interest. It also sold PS&E for $850 million in February, generating a reported pre-tax gain of $85 million.
Outlook, risks, and unusual items
- FIS expected SunGard cost-synergy run-rate savings to exceed $325 million by year-end 2017. The filing does not provide a specific full-year revenue or EPS guidance figure.
- Management described recurring, multi-year client contracts as a source of revenue stability and identified digital banking, payments, outsourcing, and international markets as opportunities. It also highlighted competition, bank consolidation, slower EMV card-production activity, and uncertainty around emerging digital-payment technologies.
- Information-security incidents, service interruptions, implementation failures, regulatory changes, acquisition integration, and foreign-exchange movements are among the stated business risks. A 100-basis-point increase in LIBOR was estimated to raise annual debt service by about $6 million at period-end debt levels.
- Q3 included a $167 million pre-tax charge related to debt tenders and extinguishment costs. The company repurchased about $2.0 billion of debt securities, funded in part with proceeds from its first European bond offering. The filing also reports divestiture-related losses; descriptions of the Capco-related loss differ between the notes and MD&A, so the precise amount and classification merit review.
- Brazilian tax authorities had asserted potential exposure of approximately $71 million across 34 claims; FIS did not consider a liability probable and recorded no accrual. A separate Reliance Trust class action was at an early stage, and potential loss could not be estimated. The balance sheet included an $89 million liability primarily for SunGard-related unclaimed-property and tax matters.
- Disclosure controls were judged effective, and the company reported no material change in internal control over financial reporting. No material changes to the previously disclosed risk factors were reported.
Investor verification priorities
- Reconcile the divestiture-related loss amounts and their presentation across the notes and MD&A, and assess the impact of all debt-extinguishment and sale-related items on reported earnings.
- Track continuing-business revenue and margins after the PS&E and consulting-business divestitures, including whether segment growth and SunGard synergies persist.
- Review the bridge from operating cash flow to earnings, particularly tax payments, working-capital movements, and the timing of settlement-related balances.
- Monitor debt, revolver usage, debt maturities, repurchases, and dividends alongside management’s liquidity assessment.
- Assess the potential outcomes of the Brazilian tax claims and Reliance Trust litigation, and the financial implications of the 2018 revenue-recognition standard adoption.