FIS 2012 Second-Quarter Form 10-Q Summary
Business context and reporting period
Fidelity National Information Services, Inc. (FIS) provides banking and payments technology, processing, software and consulting services. It reports four segments: Financial Solutions Group (FSG), Payment Solutions Group (PSG), International Solutions Group (ISG), and Corporate and Other. This unaudited 10-Q covers the quarter and six months ended June 30, 2012; comparisons are with the same periods in 2011 unless noted.
Financial performance and position
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Processing and services revenue | $1,457.2 million | $1,413.3 million | $2,870.6 million | $2,766.1 million |
| Gross profit / gross margin | $476.1 million / 32.7% | $423.9 million / 30.0% | $900.0 million / 31.4% | $800.4 million / 28.9% |
| Operating income / operating margin | $282.7 million / 19.4% | $254.6 million / 18.0% | $505.2 million / 17.6% | $464.3 million / 16.8% |
| Continuing earnings attributable to FIS common stockholders | $155.8 million | $126.6 million | $247.3 million | $220.1 million |
| Diluted EPS from continuing operations | $0.52 | $0.41 | $0.83 | $0.71 |
| Net earnings attributable to FIS, including discontinued operations | $150.6 million | $123.5 million | $237.7 million | $216.3 million |
Revenue increased 3.1% in Q2 and 3.8% in the first half. Management attributed growth to processing volumes, transaction growth, and professional and consulting services, partly offset by weaker item processing and retail check activity. A stronger U.S. dollar reduced revenue by $35.0 million in Q2 and $45.4 million in the first half. Cost management and operating leverage supported higher consolidated margins.
For the six months, operating cash flow was $462.7 million, versus $523.5 million in 2011; investing cash outflow was $197.4 million and financing cash outflow was $140.2 million. Cash increased $118.3 million to $533.8 million at June 30. Operating cash flow was lower mainly due to settlement timing, a $42.4 million final interest-rate-swap payment, a $28.0 million payment to the Brazilian venture partner, and other working-capital changes. Capital expenditures, excluding capital leases, were $155.7 million.
At June 30, total assets were $13.943 billion and total liabilities were $7.138 billion. Debt was $4.864 billion, including $127.9 million current and $4.736 billion long-term; cash was $533.8 million. The revolving facility had $548.0 million outstanding and $601.2 million of remaining borrowing capacity, net of letters of credit. Current assets were $2.158 billion and current liabilities were $1.121 billion. Debt was $4.810 billion at December 31, 2011.
Material changes versus prior period
- SG&A rose $24.1 million in Q2 and $58.7 million in the first half. First-half 2012 includes $18.5 million of executive-related compensation and change-in-role charges; first-half 2011 included a $13.0 million loss from unauthorized activity on the Sunrise prepaid-card platform.
- Net interest expense declined $9.2 million in Q2 and $17.8 million in the first half, primarily reflecting lower borrowing costs and debt reduction. First-half 2012 other expense also included $12.7 million of refinancing transaction costs and a $5.7 million write-off of previously capitalized debt costs.
- FIS amended and restated its credit agreement in March 2012 and issued $700 million of 5.000% senior notes due 2022. It repaid the remaining $200 million Term Loan B during Q2. The debt mix changed, while total debt at June 30 was higher than at year-end.
- FIS repurchased $50.0 million of shares in April under a new authorization of up to $1.0 billion through 2015. First-half dividends paid were $117.7 million, and the quarterly dividend increased from $0.05 to $0.20 per share beginning in Q1 2012.
- FSG revenue grew, but its operating margin declined, which management attributed to mix and increased information-security and infrastructure spending. PSG margins improved on electronic-payment growth and expense initiatives; ISG margins also improved despite currency headwinds.
Outlook, risks, contingencies and unusual items
- Management expects operating cash flow over the next 12 months to fund operating needs and debt service. It anticipates a 2012 effective tax rate of approximately 33% and capital expenditures of approximately 5%–6% of 2012 revenue, including security investments.
- The planned sale of the Healthcare Benefit Solutions Business for $335 million in cash was expected to close by the end of Q3 2012, subject to customary conditions. FIS anticipated an after-tax loss of approximately $55 million, or $0.19 per share, on completion. The business generated first-half revenue of $65.2 million and pretax earnings of $13.7 million.
- FIS estimated that the M&I Bank/BMO Harris system migration would reduce annual EBITDA run rate by approximately $60 million; it expected the 2013 impact to be about half that amount as migration phases in. FIS said it expected to retain a substantial long-term relationship with the combined entity, but no new agreement had been reached.
- Brazil discontinued-operation labor claims remain a significant contingency: approximately 1,800 active claims were outstanding, and the accrued liability for active and unasserted claims was $40.2 million at June 30. The company expects continued exposure; changes in estimates will affect discontinued operations.
- Following the 2011 Sunrise cyber-incident, regulators issued a confidential examination report and distributed a letter to clients in March 2012 describing requested security enhancements. FIS reported no significant operating impact to date, but noted weaker Q2 sales to North American financial institutions and uncertainty about future regulatory communications and sales effects. The law-enforcement investigation continued.
- A patent-infringement action filed in January 2012 is ongoing; FIS stated that a possible loss or range could not yet be estimated. A separate FCRA class action settlement received preliminary court approval; final approval was scheduled for September 25, 2012, and the recorded estimated liability was not material.
- Other business risks include economic and banking-industry conditions, customer consolidation, technology and competitive changes, privacy and regulatory requirements, cybersecurity, foreign exchange, interest rates, and the effects of leverage. A 100-basis-point LIBOR increase was estimated to raise annual debt service by $15.6 million after swaps, based on debt outstanding at June 30.
Most important facts for investors to verify
- Whether the Healthcare Business sale closed as expected, the final proceeds and loss, and the use of proceeds.
- The timing and realized financial effect of the M&I/BMO Harris migration and the estimated $60 million annual EBITDA run-rate reduction.
- Progress on regulatory security enhancements, any later client or regulator communications, and any effect on sales, costs, or customer retention.
- Developments and adequacy of the $40.2 million Brazilian labor-claims accrual, and outcomes of the disclosed litigation.
- Debt levels, covenant compliance, refinancing costs, interest-rate exposure, cash generation, and the capacity to sustain dividends and share repurchases.
- Whether reported growth and margin improvement persist after foreign-exchange effects, unusual charges, and discontinued operations are considered.