Business context and reporting period
Fidelity National Information Services, Inc. (FIS) provides banking and payments technology, processing, software and consulting services. This unaudited Form 10-Q covers the quarter and six months ended June 30, 2013; comparisons are with the same 2012 periods. Reporting segments are Financial Solutions Group (FSG), Payment Solutions Group (PSG), International Solutions Group (ISG), and Corporate and Other.
Financial performance and position
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Revenue | $1,512.5m | $1,457.2m | $2,990.5m | $2,870.6m |
| Gross profit / margin | $484.3m / 32.0% | $476.1m / 32.7% | $954.3m / 31.9% | $900.0m / 31.4% |
| Operating income / margin | $247.6m / 16.4% | $282.7m / 19.4% | $522.7m / 17.5% | $505.2m / 17.6% |
| Net earnings attributable to FIS | $104.8m | $150.6m | $248.9m | $237.7m |
| Diluted EPS | $0.36 | $0.50 | $0.84 | $0.80 |
| Operating cash flow | Not separately stated for the quarter | $364.8m | $462.7m |
- Q2 revenue grew 3.8%; first-half revenue grew 4.2%. Management attributed growth to termination fees, acquisitions, processing volumes, and demand for professional and consulting services. Stronger U.S. dollar reduced revenue by $7.1m in Q2 and $22.5m in the first half.
- Q2 operating income fell despite revenue growth; first-half operating income increased modestly. First-half earnings from continuing operations attributable to FIS were $239.2m, down from $247.3m; diluted continuing-operations EPS was $0.81 versus $0.83.
- At June 30, cash and equivalents were $653.1m and total debt was $4,756.4m, including $83.7m current debt. Cash at year-end 2012 was $517.6m and debt was $4,385.5m. Approximately $445.6m of cash was held by foreign entities.
- FIS had $1,699.2m of remaining capacity on its $2.0bn revolving facility, net of letters of credit. Management said cash and expected operating cash flows would be sufficient for operating needs and debt service over the next 12 months.
- First-half investing cash outflow was $283.1m, including $130.1m for acquisitions and equity investments. Capital expenditures excluding capital leases were approximately $157m; the company expected 2013 capital spending of 5–6% of revenue.
Material changes, outlook and risks
- Q2 SG&A included a $50.2m increase in the Capco contingent-payment liability, reflecting improved performance and growth expectations for 2013–2015. Higher information-security, sales and infrastructure costs also affected expenses.
- Other expense included $45.3m related to the early redemption of the 7.625% 2017 notes and $16.1m of refinancing-related write-offs and transaction costs; the first half also included a $9.2m gain on the mFoundry acquisition. FIS issued $250m of 2.0% notes due 2018 and $1.0bn of 3.5% notes due 2023, refinanced its credit agreement, and redeemed the 2017 notes. Interest expense declined year over year.
- FIS acquired the remaining interest in mFoundry for $115m net of cash acquired. A $16.7m after-tax ClearPar earn-out gain boosted discontinued-operations earnings. Brazil Participacoes labor-claim exposure remained: about 1,400 active claims and a $32.2m net accrued liability.
- Quarterly cash dividends increased to $0.22 per share beginning in Q1 2013; management expected to continue quarterly dividends, subject to board discretion and debt covenants. No numerical revenue or earnings guidance was provided.
- Key risks include cyber and information-security incidents, regulatory scrutiny, customer retention and banking-industry consolidation, competition and pricing, transaction-volume trends, foreign exchange, and technology change. Regulators distributed a confidential examination report on information security, risk management and internal audit to some clients; FIS said it was addressing findings, had not identified significant business losses from the distribution, and could not predict future effects. The company said it had invested over $100m in risk and information security over the prior 18 months.
- Two patent-infringement cases were disclosed; FIS could not estimate potential losses in either. The company also reported foreign-currency exposure and estimated a 100-basis-point LIBOR increase would raise annual debt service by $10.2m after swaps, based on period-end debt.
Investor verification points
- Assess how much of reported earnings and margins reflects the Capco contingent-liability charge, debt-redemption costs, and discontinued-operation gains or losses.
- Review cash conversion and working-capital drivers behind the decline in first-half operating cash flow.
- Confirm debt maturities and refinancing requirements, particularly the $1.66bn of scheduled Term Loan A-4 principal payments in 2017, as well as available revolver capacity and covenant terms.
- Monitor the Capco earn-out estimate, Brazil labor claims, patent litigation, and regulatory/client response to the security examination report.
- Track segment growth and margins, foreign-exchange effects, capital spending against the 5–6% outlook, and dividend and repurchase activity.