Fidelity National Information Services, Inc. — Q3 2011 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2011. FIS provides banking and payments technology, processing, software and related services through Financial Solutions Group (FSG), Payment Solutions Group (PSG), International Solutions Group (ISG), and Corporate and Other. Figures are unaudited; dollar amounts are in millions unless stated otherwise.
Financial performance and liquidity
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Revenue | $1,426.2 | $1,367.2 | $4,251.3 | $3,873.2 |
| Gross profit / margin | $441.9 / 31.0% | $469.9 / 34.4% | $1,263.5 / 29.7% | $1,192.3 / 30.8% |
| Operating income / margin | $276.4 / 19.4% | $176.1 / 12.9% | $749.2 / 17.6% | $547.6 / 14.1% |
| Continuing earnings attributable to FIS common stockholders | $145.4 | $134.3 | $370.8 | $326.3 |
| Net earnings attributable to FIS | $136.3 | $110.4 | $352.6 | $293.9 |
| Diluted EPS, continuing operations / total | $0.47 / $0.44 | $0.40 / $0.33 | $1.20 / $1.14 | $0.89 / $0.80 |
| Operating cash flow | Not separately presented | Not separately presented | $799.1 | $785.9 |
- Cash and debt: Cash was $386.8 at September 30, 2011, including approximately $204.4 held by foreign entities. Total debt was $4,866.0, of which $538.3 was current. The company reported $857.7 of remaining revolving borrowing capacity, net of letters of credit.
- Cash uses and investment: Nine-month investing cash outflow was $228.6; property and equipment and software additions totaled $221.8. Financing cash outflow was $513.4, including $188.5 of treasury-stock purchases and $48.0 of dividends and other distributions. Quarterly dividend was $0.05 per share.
- Other balance-sheet measures: Total assets were $13,885.5 and total equity was $6,750.9 at September 30, 2011. Operating cash flow less property and equipment and software additions was approximately $577.3 for the nine-month period; this is a simple calculation, not a company-reported free-cash-flow measure.
Changes versus the prior comparable period
- Revenue increased 4.3% in Q3 and 9.8% year to date. Management attributed growth primarily to 2010 acquisitions, professional services and processing revenues. Nine-month growth also reflects favorable foreign-exchange effects; management cited $55.3 of favorable currency impact on ISG revenue.
- Q3 gross profit declined despite higher revenue, and gross margin fell 340 basis points. Management said the 2010 comparison benefited from an $83.3 Banco Santander termination fee. The same fee also affected year-to-date comparisons.
- Operating income and margin increased, partly because 2010 included $154.9 of impairment charges. Q3 2011 operating income also reflected the absence of those charges.
- Nine-month net interest expense rose to $194.3 from $108.4, primarily due to higher debt levels after the 2010 leveraged recapitalization and higher interest rates. Weighted average diluted shares fell to 308.8 from 367.7 for the nine-month period, supporting higher EPS.
- Segment trends: FSG revenue rose 7.8% in Q3 and 11.3% year to date, with lower margins as professional services grew. PSG revenue was nearly flat; lower check and item-processing activity and a change to net presentation of certain merchant interchange fees weighed on reported revenue. ISG revenue increased, but comparisons reflect the prior-year termination fee and impairment charges.
Outlook, risks and unusual items
- Outlook: No quantified earnings or revenue guidance is provided in the filing. Management said it was cautious about broad economic improvement, expected continued bank investment in technology, and believed FIS was positioned to benefit as markets recover. It expected operating cash flows over the next 12 months to cover operating needs and debt principal and interest. Management expected 2011 capital expenditures of approximately 6% of revenue and said it expected to continue the $0.05 quarterly dividend, subject to board discretion and contractual restrictions.
- Debt and liquidity risks: The company was in compliance with credit-agreement covenants at quarter-end. Mandatory principal payments shown for 2012 total $530.4; the Term Loan A-1 and a portion of Term Loan A-2 mature or are due that year. Management also identified 2012 cash requirements for $42.4 of accrued and future reset payments on an assumed interest-rate swap and a $34.1 current liability due to the Brazilian venture partner. A 100-basis-point LIBOR increase was estimated to raise annual debt service by $5.3 after swaps.
- Brazil discontinued operations: Brazilian processing volume was transitioned during Q2 2011. Q3 and nine-month 2011 results included $12.6 and $28.1, respectively, in additional accruals for potential former-employee labor claims. The accrued liability was $29.2 at September 30, 2011; claims may continue for approximately two years.
- Security incident: FIS recorded a $13.0 loss in Q1 related to unauthorized activity involving one client and 22 prepaid-card accounts on the Sunrise platform. Approximately 7,200 accounts may have been at risk and three cardholders’ non-public information may have been disclosed. The company reported no further financially harmful unauthorized activity after Q1, and said it had completed its investigation and was implementing additional security measures.
- Regulatory and market exposure: Management cited the Dodd-Frank Act and Durbin Amendment as potential drivers of changes in payment volumes, customer practices, investment timing and required product modifications. Other stated risks include customer consolidation, competition, technology adaptation, economic conditions, security breaches, acquisition integration, foreign exchange, and operational or natural disasters.
- Legal matter: A putative class action alleging Fair Credit Reporting Act disclosure violations remained in discovery. The filing said an estimate of possible loss, if any, could not be made. FIS also disclosed ordinary-course litigation and customer indemnification and software warranty obligations; it reported no significant historical warranty costs.
- Capital returns: FIS repurchased 6.6 million shares for $181.0 during Q3 under its existing program. After quarter-end, on October 18, 2011, the board authorized up to $500.0 of additional repurchases through December 31, 2013.
Most important facts for investors to verify
- How FIS plans to address the 2012 debt maturities and scheduled principal payments, and whether operating cash flow and available borrowing capacity remain adequate.
- Whether the Brazilian labor-claim accrual is sufficient and how final claim amounts affect discontinued-operations results and cash requirements.
- Underlying revenue and margin trends excluding acquisition contributions, foreign exchange, the Santander termination fee, impairment charges, and merchant-fee presentation changes.
- Progress and any further financial or customer impact from the Sunrise prepaid-card security incident.
- Whether regulatory changes, bank consolidation, transaction volumes, and the lower-margin professional-services mix affect expected growth and profitability; the filing provides no specific numerical guidance.