FIS Q1 2014 Form 10-Q Summary
Business context and period. Fidelity National Information Services, Inc. (FIS) provides banking technology, payment processing, consulting and outsourcing services. This unaudited report covers the three months ended March 31, 2014, compared with the first quarter of 2013, unless otherwise noted. FIS reports Financial Solutions Group (FSG), Payment Solutions Group (PSG), International Solutions Group (ISG), and Corporate and Other.
Financial results
| Metric | Q1 2014 | Q1 2013 | Change / context |
|---|---|---|---|
| Processing and services revenue | $1,520.3 million | $1,478.0 million | Up 2.9%; reported revenue included $15.7 million of unfavorable currency impact |
| Gross profit / margin | $470.3 million / 30.9% | $470.0 million / 31.8% | Margin down 0.9 percentage points |
| Operating income / margin | $283.7 million / 18.7% | $275.1 million / 18.6% | Income up 3.1%; margin slightly higher |
| Continuing earnings attributable to FIS common stockholders | $154.9 million | $148.0 million | Diluted continuing EPS was $0.53 vs. $0.50 |
| Net earnings attributable to FIS common stockholders | $154.5 million | $144.1 million | Diluted EPS was $0.53 vs. $0.49 |
| Operating cash flow | $222.6 million | $207.5 million | Up $15.1 million |
| Cash and cash equivalents, March 31 | $737.7 million | $590.6 million | Balance-sheet comparison is to year-end 2013: $547.5 million |
| Total debt, March 31 | $4,778.6 million | — | $4,468.6 million at December 31, 2013 |
Interest expense declined $10.6 million year over year, primarily reflecting lower borrowing rates after 2013 refinancing. The prior-year quarter included a $9.2 million gain related to the mFoundry acquisition. The effective tax rate on continuing operations was 33% in both periods.
Segments
- FSG: Revenue $586.8 million, up from $575.3 million; operating income $187.0 million, down from $188.4 million.
- PSG: Revenue $619.5 million, up from $611.8 million; operating income $235.5 million, down from $238.5 million.
- ISG: Revenue $314.4 million, up from $291.6 million; operating income $39.4 million, down from $40.3 million. Revenue growth was partly offset by $14.0 million of unfavorable currency impact.
Liquidity, cash flow and capital allocation
- Cash flow from operations was $222.6 million. Investing used $81.4 million and financing provided $42.4 million; cash increased $190.2 million during the quarter.
- Capital expenditures were approximately $89.9 million, compared with $73.7 million in Q1 2013. FIS expects 2014 capital expenditures to be approximately 5.5%–6% of revenue.
- FIS had $737.7 million in cash and $4,778.6 million in debt at quarter-end. Approximately $461.4 million of cash was held by foreign entities and would generally be subject to U.S. income tax upon repatriation.
- The revolving credit facility had $443.0 million outstanding and $1,556.2 million of remaining borrowing capacity, net of letters of credit. FIS stated that cash and expected operating cash flows should be sufficient for operating needs, capital expenditures and mandatory debt service over the next 12 months.
- FIS paid a quarterly dividend of $0.24 per share and repurchased $175.0 million of stock. A new authorization allows up to $2.0 billion of repurchases through December 31, 2017; $1,825.0 million remained available at quarter-end.
Material changes and management commentary
- Revenue growth reflected consulting and professional services demand, contributions from 2013 acquisitions and international expansion. Stronger U.S. currency reduced reported revenue by $15.7 million and operating income by $3.3 million.
- Gross margin declined mainly because professional services represented a greater share of revenue and termination fees and software license revenue were lower. Management notes that professional services generally carry lower gross margins and are less recurring.
- Management expects consulting and professional services revenue growth to continue in 2014 and plans an incremental $30 million investment in the large global financial institutions initiative. The filing does not provide quantified earnings or revenue guidance.
- FIS expects international growth to continue, citing new large-scale outsourcing clients and opportunities across regions. It also sees opportunities in mobile banking, payments, risk management and financial-institution technology spending, while noting uncertainty about emerging mobile payment technologies.
- Management expects continued decline in check use and ongoing bank consolidation; either may pressure parts of the business. It said the Durbin amendment’s impact on card volumes had been insignificant and its impact on the EFT network business modestly favorable to date.
Risks, contingencies and unusual items
- FIS identifies cyberattacks, data-security incidents, regulatory actions, competitive pricing, technology change, customer consolidation and foreign exchange movements as risks. A 100-basis-point LIBOR increase was estimated to raise annual debt service by $10.4 million after interest-rate swaps.
- Two patent cases are disclosed: the CheckFree/CashEdge matter was stayed pending patent review; the DataTreasury case remained pending, with trial scheduled for April 13, 2015. FIS could not estimate a possible loss or range for either case.
- FIS reported approximately 940 active labor claims related to its former Brazilian processing and remittance operations. The accrued liability was $26.0 million, net of $15.2 million in court-ordered deposits.
- The quarter included a $0.4 million loss from discontinued operations, versus a $3.9 million loss a year earlier. The 2014 quarter also included a favorable $18.7 million of other comprehensive earnings, principally reflecting foreign-currency translation.
- FIS reported no material changes to the risk factors in its 2013 Form 10-K, no material changes in contractual obligations, and no off-balance-sheet arrangements. Disclosure controls were assessed as effective.
Important facts for investors to verify
- Whether revenue growth and international expansion can offset currency headwinds and the lower margins associated with consulting-services mix.
- Progress on planned 2014 investment, capital expenditures, dividends and sizable share repurchases relative to cash generation and debt levels.
- Debt maturities and floating-rate exposure, including the $1.66 billion of scheduled Term Loan A-4 principal payments in 2017 and the remaining revolving-facility capacity.
- Updates on the patent litigation and Brazilian labor claims, for which potential losses are uncertain or remain contingent.
- Future effects of cybersecurity threats, regulatory developments, bank consolidation, declining check usage and competition in mobile payments.