Fidelity National Information Services, Inc. — Q2 2009 Form 10-Q
Business context and reporting period. Unaudited results cover the quarter and six months ended June 30, 2009. FIS provides financial-institution and business processing services in four segments: Financial Solutions, Payment Solutions, International, and Corporate and Other. Comparisons are affected by the July 2008 spin-off of Lender Processing Services (LPS); LPS’s prior-period results are presented as discontinued operations.
Financial performance
| Metric | Q2 2009 | Q2 2008 | Six months 2009 | Six months 2008 |
|---|---|---|---|---|
| Revenue | $834.8 million | $869.7 million | $1,632.6 million | $1,700.0 million |
| Gross profit / margin | $232.1 million / 27.8% | $195.7 million / 22.5% | $432.7 million / 26.5% | $377.3 million / 22.2% |
| Operating income / margin | $117.4 million / 14.1% | $57.9 million / 6.7% | $199.3 million / 12.2% | $109.1 million / 6.4% |
| Continuing-operations earnings attributable to FIS | $59.6 million | $13.3 million | $93.9 million | $24.2 million |
| Net earnings attributable to FIS | $59.2 million | $71.9 million | $92.2 million | $142.4 million |
| Diluted EPS from continuing operations | $0.31 | $0.07 | $0.49 | $0.12 |
| Diluted EPS, total | $0.31 | $0.37 | $0.48 | $0.73 |
Revenue declined 4.0% in both comparison periods, mainly due to unfavorable foreign-currency translation. Excluding currency effects, International revenue grew 1.4% in Q2 and 6.0% year to date, while Financial Solutions and Payment Solutions declined. FIS attributed higher gross and operating margins chiefly to cost reductions, improved efficiency, and lower prior-year integration, restructuring, and spin-off-related costs. Interest expense fell to $31.8 million in Q2 and $63.8 million year to date, from $43.6 million and $82.4 million, respectively, reflecting lower debt and borrowing rates; the 2008 six-month period also included a $9.3 million debt make-whole premium.
Prior-year discontinued-operations earnings included LPS earnings: $58.6 million attributable to FIS for Q2 2008 and $118.2 million for the first half of 2008. Accordingly, total net earnings comparisons are not directly like-for-like with continuing operations.
Cash flow, balance sheet and liquidity
- Six-month operating cash flow was $331.1 million, versus $242.8 million in 2008. The filing says 2008 operating cash flow included $136.7 million from LPS; excluding LPS, operating cash flow increased $225.0 million, attributed to higher earnings and improved working-capital management.
- Six-month cash used in investing was $100.0 million; capital expenditures were $96.2 million, including $27.1 million for property and equipment and $69.1 million for capitalized software. Cash used in financing was $234.4 million. Cash rose $7.0 million to $227.9 million.
- At June 30, 2009, total debt was $2,292.1 million, including $158.1 million current debt; long-term debt excluding the current portion was $2,134.0 million. Cash was $227.9 million, of which approximately $175.3 million was held by foreign operations. The company reported $565.9 million of unused revolving capacity.
- Total assets were $7,439.8 million; current assets were $1,094.9 million and current liabilities were $881.9 million. Goodwill was $4,200.2 million. Total equity was $3,888.3 million.
- Management expected operating cash flow over the next 12 months to fund operating needs and debt service absent unusual circumstances or adverse business changes. FIS paid a $0.05 quarterly dividend and said it expected to continue the dividend, subject to board discretion and debt covenants.
Material changes, outlook and risks
- Debt declined from $2,514.5 million at December 31, 2008 to $2,292.1 million at June 30, 2009. Term Loan A and the revolving facility mature in January 2012; $1,871.6 million of principal was scheduled for 2012. FIS was in compliance with credit-facility covenants at quarter end.
- Management said it reduced domestic headcount and capital expenditures amid difficult economic conditions. It forecast 2009 capital expenditures at approximately 5%–7% of revenue. No earnings or revenue guidance was provided in the supplied filing text.
- FIS reported that financial institutions may defer software sales and professional-services projects; these represented approximately 14% of 2008 revenue. Management also cited potential bank failures, reduced transaction activity, customer consolidation, technology and competition risks, and possible lender failures. It estimated exposure to bank failures and related government actions to date at less than 1% of revenue, excluding potential integration-related opportunities.
- The company was pursuing its announced acquisition of Metavante. Under the agreement, Metavante shareholders would receive 1.35 FIS shares per share; planned private placements to THL and FNF totaled approximately $250 million. Closing was expected in Q4 2009, subject to shareholder approvals, U.S. antitrust clearance, and other conditions. Two putative shareholder suits sought to enjoin the merger and unspecified damages; FIS said it considered the claims meritless and intended to defend them.
- Other disclosed litigation included a Texas debt-collection class action settlement subject to court approval, appeals in Driver’s Privacy Protection Act matters, and a Fair Credit Reporting Act class action that FIS said it was vigorously defending. The filing does not provide a clear estimate of potential losses for these matters.
- Interest-rate swaps with $2.1 billion aggregate notional amount converted part of floating-rate debt to fixed rates. FIS estimated that a 100-basis-point LIBOR increase would raise annual debt service by $1.9 million after swaps. Foreign-currency translation materially reduced reported revenue; the filing says an assumed 10% currency move would not have materially affected earnings.
Most important facts for investors to verify
- Metavante transaction approvals, regulatory clearance, financing terms, and closing status, as well as any merger-related costs or litigation developments.
- Whether cost savings and margin improvements are sustainable, especially as revenue declined and transaction volumes remain exposed to economic conditions.
- Debt maturities, covenant compliance, revolver availability, and the effect of interest-rate swaps as they approach expiration.
- Cash conversion and working-capital trends; cash flow comparisons are affected by LPS’s prior-period contribution and capital spending declined year over year.
- Currency movements, check-business strategic alternatives, litigation outcomes, and any changes in dividend capacity or the stated capital-spending outlook.