Fidelity National Information Services, Inc. — Q3 2010 Form 10-Q
Reporting period: Three and nine months ended September 30, 2010; 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. The October 1, 2009 Metavante acquisition materially affects comparison with 2009, which includes no Metavante results.
Financial performance
| Metric | Q3 2010 | Q3 2009 | Nine months 2010 | Nine months 2009 |
|---|---|---|---|---|
| Processing and services revenue | $1,367.2 million | $828.7 million | $3,873.2 million | $2,428.1 million |
| Gross profit / margin | $469.9 million / 34.4% | $223.3 million / 26.9% | $1,192.3 million / 30.8% | $605.9 million / 25.0% |
| Operating income / margin | $176.1 million / 12.9% | $133.9 million / 16.2% | $547.6 million / 14.1% | $330.2 million / 13.6% |
| Continuing earnings attributable to FIS common stockholders | $134.3 million | $66.6 million | $326.3 million | $158.6 million |
| Net earnings attributable to FIS common stockholders | $110.4 million | $67.6 million | $293.9 million | $159.8 million |
| Diluted EPS, continuing operations / total | $0.40 / $0.33 | $0.34 / $0.35 | $0.89 / $0.80 | $0.82 / $0.83 |
- Cash flow: Nine-month operating cash flow was $785.9 million, versus $505.0 million. Investing cash flow was negative $220.9 million and financing cash flow was negative $604.4 million. Cash ended at $389.4 million, down from $430.9 million at year-end 2009.
- Liquidity and debt: At September 30, cash was $389.4 million and total debt was $5,096.3 million, including $267.5 million current and $4,828.8 million long-term. The company reported $874.2 million of available revolving capacity and $145 million available under its receivables facility.
- Capital spending and dividends: Nine-month capital expenditures were approximately $227.3 million. FIS paid $0.05 per share quarterly and expected 2010 capital expenditures to be about 6% of revenue.
Material changes and drivers
- Revenue increased 65.0% in Q3 and 59.5% year to date, primarily from Metavante, with additional contribution from an $83.3 million Banco Santander termination fee, higher transaction volumes and software and professional-services demand. Foreign currency also aided year-to-date revenue; declining paper-based check activity partially offset growth.
- Gross margin improved, which management attributed to Metavante synergies and the termination fee. Q3 operating margin nevertheless declined from 16.2% to 12.9%, mainly due to $154.9 million of impairment charges and integration costs.
- Net earnings attributable to FIS increased, but total net earnings in Q3 declined to $61.0 million from $69.0 million. Discontinued-operation losses and the noncontrolling-interest allocation affected reported results. Diluted total EPS was $0.33 versus $0.35; the substantially higher weighted-average share count following the tender offer also affects per-share comparisons.
- Interest expense rose to $60.9 million in Q3 from $31.8 million, reflecting higher debt levels and rates. Nine-month interest expense was $108.4 million versus $94.3 million.
- Segment revenue rose across FSG, PSG and ISG, substantially reflecting Metavante. ISG recorded a Q3 operating loss of $38.6 million, primarily because of Brazilian Venture impairment charges; FSG and PSG reported higher operating income and margins.
Outlook, commentary and risks
- FIS gave no specific revenue or earnings guidance in the supplied filing text. Management said operating cash flows were expected to fund operating needs and debt service over the next 12 months, and expected Metavante cost and revenue synergies through 2011.
- Management noted that approximately 85% of revenue comes from multi-year agreements, while transaction volumes and discretionary software and professional-services spending remain exposed to economic conditions. It cited continuing demand for electronic payments and outsourcing, alongside declining check use and potential effects from bank failures and industry consolidation.
- The Dodd-Frank Act’s debit interchange and network provisions were expected to take effect in Q3 2011. Because implementing regulations were not yet drafted and interchange is primarily a pass-through cost, the effect on FIS revenue was unclear.
- Brazil: Banco Santander exited the card-processing venture, paid an $83.3 million termination fee, and relinquished its ownership. The transaction generated a reported $17.2 million net increase in earnings attributable to FIS after associated write-offs, tax and noncontrolling-interest effects. FIS recorded $154.9 million of related impairment charges in continuing operations. Separately, Participacoes suffered worsening losses and customer volume risk; FIS classified it as held for sale and recorded $25.0 million of asset impairments. FIS was pursuing strategic alternatives.
- Financing and capital allocation: The 2010 leveraged recapitalization included a $1.5 billion Term Loan B and $1.1 billion of senior notes bearing 7.625% and 7.875% interest, due 2017 and 2020. Proceeds helped fund the tender offer, which repurchased 86.2 million shares at $29 per share. Higher leverage, debt service, covenants and refinancing requirements are material considerations.
- Other risks identified include integration and realization of acquisition synergies, cybersecurity and operational disruption, customer losses, competition and pricing, regulatory change, foreign exchange and interest-rate exposure, and access to capital. A 100-basis-point LIBOR increase was estimated to add $4.0 million to annual debt service after swaps.
- Subsequent events: FIS acquired ValueCentric Marketing Group on October 8, 2010 for $32.8 million cash at closing plus contingent consideration, and agreed to acquire Capco for $292 million cash at closing plus contingent consideration, with closing expected in Q4 2010.
Investor facts to verify
- Separate acquisition-driven growth from organic trends; the 2009 comparison excludes Metavante for most of the period.
- Review the quality and recurrence of earnings, especially the Santander termination fee, related write-offs, legal-cost recovery, discontinued operations and noncontrolling-interest effects.
- Track the Brazilian Venture’s post-Santander operating arrangements with Banco Bradesco and the outcome of the Participacoes strategic-alternatives process.
- Assess debt maturities, interest costs, covenant headroom, available revolver capacity and the effect of the recapitalization and subsequent acquisitions on leverage.
- Confirm whether expected Metavante synergies, capital spending plans and cash-flow expectations are being achieved, and monitor implementation of Dodd-Frank rules.