Fidelity National Information Services, Inc. — Q3 2013 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2013. Financial statements are unaudited. FIS provides banking and payments technology, processing, software, and outsourcing services through Financial Solutions Group (FSG), Payment Solutions Group (PSG), International Solutions Group (ISG), and Corporate and Other.
Financial performance
| Metric | Q3 2013 | Q3 2012 | 9M 2013 | 9M 2012 |
|---|---|---|---|---|
| Revenue | $1,501.7m | $1,436.9m | $4,492.2m | $4,307.5m |
| Gross profit / margin | $507.1m / 33.8% | $468.1m / 32.6% | $1,461.4m / 32.5% | $1,368.1m / 31.8% |
| Operating income / margin | $318.1m / 21.2% | $287.9m / 20.0% | $840.8m / 18.7% | $793.1m / 18.4% |
| Continuing earnings attributable to FIS | $175.6m | $147.8m | $414.8m | $395.1m |
| Net earnings attributable to FIS | $172.3m | $86.8m | $421.2m | $324.5m |
| Diluted EPS attributable to FIS | $0.59 | $0.29 | $1.43 | $1.09 |
Revenue increased 4.5% in Q3 and 4.3% year to date. Management attributed growth to higher termination fees, acquisitions, transaction volumes, and demand for professional and consulting services. Stronger U.S. currency reduced reported revenue by $14.6m in Q3 and $37.1m year to date. Gross and operating margins improved, reflecting a more favorable revenue mix, scale, and operating efficiencies.
Cash flow and investment: Nine-month operating cash flow was $675.9m, down from $718.0m. Investing cash outflow was $345.6m, including acquisitions and investments; capital expenditures, excluding capital leases, were $238.6m. Financing cash outflow was $22.2m. Cash and cash equivalents rose by $294.0m to $811.6m.
Debt and liquidity: Debt, including current maturities, was $4,821.2m at September 30, versus $4,385.5m at December 31, 2012. Cash was $811.6m; approximately $516.7m was held by foreign entities. The amended credit agreement provided a $2.0bn revolver, of which $366.0m was drawn and $1,633.2m remained available. Management said cash plus expected operating cash flows should cover operating needs and debt service over the next 12 months.
Material changes and notable items
- FSG, PSG, and ISG each reported higher Q3 revenue and operating income year over year. FSG Q3 operating margin was 34.6%, PSG 39.2%, and ISG 19.5%.
- Net earnings comparisons were affected by discontinued operations: Q3 2012 included a $61.0m after-tax loss, principally associated with the Healthcare Business sale. Nine-month 2013 discontinued results included a $16.7m after-tax ClearPar earn-out gain.
- FIS refinanced debt in 2013, issued $250m of 2.0% notes due 2018 and $1.0bn of 3.5% notes due 2023, and redeemed $750m principal of 7.625% notes due 2017. Nine-month other expense included a $45.3m net early-redemption charge and $16.1m of debt-cost write-offs; lower borrowing rates reduced interest expense.
- A $50.2m increase to the Capco acquisition earn-out liability was recorded in Q2, based on improved performance and expectations for 2013–2015; $43.9m was allocated to nine-month SG&A in the segment discussion.
- FIS paid $191.7m in dividends during the first nine months and repurchased $350.3m of treasury stock. Q3 repurchases were $124.9m; $299.4m of authorization remained at quarter-end.
Outlook, risks, and contingencies
- Management expected 2013 capital expenditures of approximately 5–6% of revenue and anticipated continuing quarterly dividends, subject to Board discretion. The filing provides no specific revenue or earnings guidance.
- Management cited recurring multi-year contracts as a source of revenue stability, while noting transaction volumes fluctuate with economic activity and software licensing and consulting can be less predictable. It described ongoing migration toward outsourced services and continued technology investment by banks, but cautioned that industry consolidation can either create or reduce business.
- Cybersecurity and information security are significant risks. Federal regulators issued a confidential report in May 2013 concerning examinations of FIS’s information security, risk management, and internal audit functions; FIS reported actions underway to address findings. Management had not identified a material effect on the overall sales pipeline, but could not predict future regulatory or customer actions.
- Two patent matters were disclosed: the CheckFree/CashEdge case and a DataTreasury action. FIS said it could not estimate a possible loss or range for either. Separately, approximately 1,230 active labor claims remained related to former Brazilian operations; the accrued liability, net of court-ordered deposits, was $29.3m.
- Other risks include foreign-currency movements, interest-rate exposure, privacy and regulatory changes, pricing competition, customer consolidation, and service disruption. A 100-basis-point LIBOR increase was estimated to raise annual debt service by $10.8m after swaps.
Important facts for investors to verify
- How much of earnings growth reflects continuing operations versus discontinued-operation gains and losses, and how performance trends after removing unusual items.
- Whether revenue and margin growth persists after foreign-currency effects, termination fees, acquisition contributions, and the Capco earn-out charge.
- Debt maturity and refinancing exposure, available revolver capacity, cash held abroad, and the effect of ongoing repurchases and dividends on leverage and liquidity.
- Developments in regulatory remediation and client response concerning information security, and any updates on the patent litigation and Brazilian labor claims.