Fidelity National Information Services, Inc. — Q2 2014 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2014. FIS provides banking and payments technology, processing, outsourcing and consulting services through Financial Solutions Group (FSG), Payment Solutions Group (PSG), International Solutions Group (ISG), and Corporate and Other.
Financial performance
| Metric | Q2 2014 | Q2 2013 | First half 2014 | First half 2013 |
|---|---|---|---|---|
| Revenue | $1,599.1 million | $1,512.8 million | $3,119.4 million | $2,990.1 million |
| Gross profit / margin | $506.3 million / 31.7% | $481.3 million / 31.8% | $979.0 million / 31.4% | $949.2 million / 31.7% |
| Operating income / margin | $309.7 million / 19.4% | $248.7 million / 16.4% | $595.8 million / 19.1% | $524.5 million / 17.5% |
| Net earnings attributable to FIS | $178.8 million | $104.8 million | $333.3 million | $248.9 million |
| Diluted EPS attributable to FIS | $0.62 | $0.36 | $1.15 | $0.84 |
- First-half operating cash flow was $479.1 million, versus $364.8 million in 2013. Investing cash outflow was $206.3 million, including $186.6 million of capital expenditures excluding capital leases. Financing cash outflow was $39.3 million. Cash ended the period at $793.7 million, up from $547.5 million at year-end 2013.
- At June 30, total debt was $4,923.5 million, compared with $4,468.6 million at December 31, 2013; cash was $793.7 million. The $2.0 billion revolving facility had $1,843.2 million of available capacity, net of letters of credit. Current assets were $2,834.9 million and current liabilities $1,701.3 million.
- Quarterly dividend was $0.24 per share; $0.48 per share was paid in the first half. FIS repurchased $325.5 million of stock in the first half.
Changes and segment performance
- Revenue grew 5.7% in Q2 and 4.3% in the first half. Management attributed growth to consulting and professional services, acquired businesses and international expansion; stronger U.S. dollar reduced first-half revenue by $16.8 million.
- Gross margin eased year over year, principally from a higher proportion of lower-margin professional services and lower termination-fee and software-license revenue. Operating margin improved, with SG&A lower largely because 2013 included a $43.9 million Capco contingent-consideration charge.
- Q2 FSG revenue was $629.0 million and operating income $208.0 million; PSG revenue was $623.6 million and operating income $232.9 million; ISG revenue was $346.8 million and operating income $51.7 million. Compared with Q2 2013, FSG and ISG grew, while PSG operating income declined amid lower termination fees and a shift in revenue mix.
- Comparisons also reflect unusual prior-year items: 2013 included a $26.8 million ClearPar discontinued-operations gain and a $9.2 million mFoundry acquisition gain; other 2013 expenses included refinancing-related charges and an early-redemption premium. Discontinued operations produced a $0.9 million loss in Q2 2014, versus $12.8 million income in Q2 2013.
Outlook, management commentary and risks
- No specific consolidated revenue or earnings guidance is provided. FIS expected capital expenditures of approximately 5.5%–6% of 2014 revenue and planned an incremental $30 million investment in its large global financial-institution initiative. Management said cash, operating cash flows and borrowing capacity should be sufficient for operating needs, capital expenditures and mandatory debt service over the next 12 months.
- FIS issued $1.0 billion of notes in June to repay term loans and temporarily reduce revolver borrowings. On July 15, 2014, it redeemed $500 million of 2020 notes using revolver borrowings and cash; the redemption is expected to result in an approximately $35 million pretax extinguishment charge.
- Also on July 15, FIS closed its acquisition of Reliance Financial Corporation for approximately $110 million cash. The company had committed to sell its China eCas business line during Q2, classifying it as discontinued operations.
- Key business risks include cyberattacks and information-security events, regulatory action, competitive pricing, banking-sector consolidation and customer losses, declining check usage, uncertain mobile-payments adoption, and foreign-currency exposure. The company reported two patent lawsuits for which possible losses could not be estimated. It also reported approximately 870 active labor claims tied to former Brazilian operations and a $22.7 million net accrued liability at June 30.
- Management said international business grew across major regions on a constant-currency basis and expected the trend to continue. Consulting growth may dilute consolidated gross margin and recurring-revenue mix. FIS reported effective disclosure controls and no material changes to internal controls; it reported no material changes to the risk factors in its 2013 Form 10-K.
Important facts for investors to verify
- How much of the earnings and margin improvement reflects recurring operations versus the prior-year Capco charge, refinancing costs, mFoundry gain and discontinued-operation items.
- Debt and liquidity after the July 2020-note redemption and Reliance acquisition, including the resulting $35 million estimated pretax charge and use of revolver capacity.
- Whether consulting and international growth can continue without further pressure on gross margins, and the effect of foreign exchange movements.
- Developments in the patent cases and Brazilian labor claims, and progress on the China eCas sale.
- Future capital spending, share repurchases and dividends relative to cash generation and debt obligations.