Fidelity National Information Services, Inc. — Q3 2014 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2014. FIS provides banking, payments, processing, software, consulting and outsourcing solutions, reporting through Financial Solutions Group (FSG), Payment Solutions Group (PSG), International Solutions Group (ISG), and Corporate and Other.
Financial performance
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Revenue | $1,605.3m | $1,500.0m | $4,724.7m | $4,490.1m |
| Gross profit / margin | $530.2m / 33.0% | $504.9m / 33.7% | $1,509.2m / 31.9% | $1,454.1m / 32.4% |
| Operating income / margin | $323.7m / 20.2% | $317.7m / 21.2% | $919.5m / 19.5% | $842.2m / 18.8% |
| Continuing earnings attributable to FIS | $151.7m | $175.3m | $488.1m | $415.8m |
| Diluted continuing EPS | $0.53 | $0.60 | $1.69 | $1.41 |
| Net cash from operating activities | Not separately presented for quarter | $687.1m | $675.9m |
Q3 revenue rose 7.0%; nine-month revenue increased 5.2%. Nine-month operating cash flow was $687.1m; investing cash use was $398.7m and financing cash use was $208.1m. Cash and equivalents were $611.8m at quarter-end, versus $547.5m at year-end 2013. Total debt, including current maturities, was $4,973.1m, compared with $4,468.6m at year-end; reported long-term debt was $4,966.8m. The $2.0bn revolving facility had $1,276.2m of remaining borrowing capacity, net of letters of credit.
Changes and drivers
- Revenue growth reflected greater consulting and professional-services demand, contributions from acquisitions, and international growth. A stronger U.S. dollar reduced nine-month revenue growth by $10.7m.
- Gross margin declined in both comparison periods, chiefly from a greater mix of lower-margin professional services and lower termination fees. Operating margin declined in Q3 but improved year to date.
- Q3 earnings attributable to FIS fell to $150.5m from $172.3m; diluted EPS declined to $0.52 from $0.59. Higher other expense, including a Clear2Pay-related currency-forward loss and debt-redemption costs, contributed to the decrease. Nine-month FIS earnings rose to $483.8m from $421.2m.
- Segment revenue increased year over year in all three operating groups. Nine-month operating income rose at FSG and ISG, but declined at PSG; consulting mix and investment in pursuing global financial institutions weighed on some segment margins.
- SG&A was lower for the nine months partly because 2013 included a $43.9m Capco contingent-payment charge. Q3 SG&A increased, including acquisition-related costs and severance.
Debt, liquidity and capital allocation
In June, FIS issued $1.0bn of notes due 2017 and 2024, using proceeds to reduce term-loan and revolving borrowings. In July, it redeemed $500m of 2020 notes, funded with revolver borrowings and cash. The redemption generated an approximately $35.4m pretax extinguishment charge. Management stated cash, operating cash flow and available borrowing capacity should fund operating needs, capital expenditures and mandatory debt service over the next 12 months. Approximately $423.1m of cash was held by foreign entities and would generally be subject to U.S. income tax if repatriated.
FIS paid $205.7m of dividends during the first nine months and repurchased $475.5m of treasury stock. The quarterly dividend was raised to $0.24 per share in 2014. The company expects 2014 capital expenditures of approximately 5.5%–6% of revenue. It expected to continue quarterly dividends, subject to board discretion and debt covenants.
Outlook, unusual items and risks
- Management described ongoing opportunities in outsourcing, consulting, international markets, mobile banking and payments, and risk-management services. It also noted uncertainty over which mobile-payment technologies will prevail and potential pressure on margins and recurring revenue as consulting grows.
- Management identified declining check use, bank consolidation, pricing competition, regulatory change, foreign exchange, and cybersecurity threats as business risks. A successful cyberattack or regulatory response could materially affect the company.
- Clear2Pay was acquired on October 1, 2014, after quarter-end, for $461.5m net of acquired cash. Reliance was acquired in July for approximately $110m. The filing does not provide quantified forward revenue or earnings guidance.
- Two patent cases—CheckFree/CashEdge and DataTreasury—were stayed pending patent-office review. FIS said it could not estimate a possible loss or range for either case. Brazil-related former-employee labor claims included approximately 820 active claims and a $15.6m accrued liability, net of court-ordered deposits.
- The China eCas business was classified as discontinued operations after FIS committed to sell it. Discontinued operations also included costs from the former Brazilian Participacoes business.
Investor facts to verify
- Whether continuing revenue growth converts into improved margins, given the shift toward consulting and lower-margin services.
- Debt and refinancing exposure, including the revolver balance, interest-rate sensitivity, and maturities; a 100-basis-point LIBOR increase was estimated to add $13.3m to annual debt service after swaps.
- Cash availability and potential tax costs associated with repatriating foreign-held cash, alongside acquisition spending, buybacks and dividends.
- Integration and expected returns from Reliance and the post-quarter Clear2Pay acquisition, and the effect of currency movements.
- Developments in the patent reviews and Brazilian labor claims; the filing does not provide estimable loss ranges for the patent cases.