FIS Q1 2015 Form 10-Q Summary
Business context and reporting period
Fidelity National Information Services, Inc. (FIS) provides banking and payments technology, processing, consulting and outsourcing services. This unaudited filing covers the three months ended March 31, 2015, compared with the first quarter of 2014. In March 2015, FIS reorganized its reporting into Integrated Financial Solutions (IFS), Global Financial Solutions (GFS), and Corporate and Other, which affects segment comparisons.
Financial results and liquidity
- Revenue: $1.555 billion, up 2.3% from $1.520 billion. Acquisitions and increased consulting and processing demand contributed; approximately $46 million of unfavorable foreign-exchange effects and a roughly $28 million decline in termination fees offset growth.
- Profit and margins: Gross profit was $484.5 million versus $475.9 million; gross margin was 31.2% versus 31.3%. Operating income fell to $215.1 million from $286.1 million, and operating margin to 13.8% from 18.8%. Continuing-operations earnings attributable to FIS shareholders were $114.0 million, or $0.40 diluted per share, versus $156.7 million, or $0.54. Net earnings attributable to FIS were $110.9 million, or $0.39 per diluted share, versus $154.5 million, or $0.53.
- Key expense items: SG&A increased to $269.4 million from $189.8 million, including $44.6 million in GFS restructuring/severance costs and $12.2 million in acquisition-related transaction and integration costs. FIS also cited project delays, investment in European capabilities, revenue mix and FX as pressures on GFS results.
- Segments: IFS revenue was $968.9 million and operating income $326.4 million (margin 33.7%), versus $937.2 million and $320.0 million (34.1%). GFS revenue was $586.9 million and operating income $47.0 million (8.0%), versus $583.5 million and $67.0 million (11.5%).
- Cash flow: Operating cash flow was $231.1 million, up from $222.6 million. Investing used $101.9 million; capital expenditures excluding leases were $101.2 million. Financing used $98.0 million, including $150.4 million of share repurchases and $73.7 million of dividends. Cash decreased $3.8 million to $489.0 million.
- Debt and liquidity: Debt totaled $5.196 billion, including $5.183 billion long-term and $13.6 million current, versus $5.068 billion at year-end. Cash plus remaining revolving-credit capacity of approximately $2.074 billion supported liquidity. FIS said cash and expected operating cash flow should cover operating needs, capital spending and mandatory debt service for the next 12 months. Approximately $285.5 million of cash was held by foreign entities and generally subject to U.S. tax if repatriated.
- Other balance-sheet measures: Total assets were $14.500 billion and equity $6.482 billion at March 31. Settlement balances are client-related; settlement deposits were $300.4 million, receivables $352.0 million and payables $603.1 million.
Material changes, outlook and risks
- Management expects 2015 capital expenditures of approximately 5.5%–6.0% of revenue and expects to continue quarterly dividends; the board raised the quarterly dividend 8% to $0.26 per share. The filing provides no specific earnings or revenue guidance.
- FIS expects consulting demand and international growth on a constant-currency basis to continue, but anticipates a moderate increase in unfavorable FX impact. Management sees potential to improve GFS margins over time through operational rationalization, scale and targeted solutions.
- Management cited outsourcing demand, digital/mobile and EMV payments as opportunities. Risks include cyberattacks and information-security events, regulatory actions, pricing competition, client consolidation, declining check use, technology shifts and foreign-currency movements.
- Discontinued operations produced a $3.1 million loss. FIS signed a January 2015 agreement to sell its China eCas business, subject to approvals and conditions, and expected closing in Q2 2015. Brazilian Participacoes labor-claim liabilities were $14.1 million net of court deposits; about 765 active claims remained.
- FIS disclosed potential Brazilian tax exposure of approximately $68 million across 31 claims, but stated that a loss was not considered probable or reasonably estimable and no reserve was recorded. In patent litigation, review boards found asserted patents unpatentable in two matters; appeals or other proceedings remained, and possible losses could not be estimated.
- FIS reported no material change in its risk factors or contractual obligations, no off-balance-sheet arrangements, and effective disclosure controls. It reported no material change to internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Whether the lower operating income and margins reflect chiefly identified one-time restructuring and acquisition costs or ongoing operating pressure.
- How much revenue and earnings growth persist after separating acquisition contributions, termination fees and foreign-exchange effects.
- Progress and cash costs of the GFS reorganization, and whether management’s expected margin improvement materializes.
- Debt repayment and refinancing needs, revolving-credit usage, and the effect of interest-rate and currency changes on cash flow and earnings.
- Outcomes and potential financial exposure from Brazilian labor and tax claims and pending patent litigation, plus completion of the China eCas sale.