Fidelity National Information Services, Inc. — Q3 2009 Form 10-Q
Reporting period: Three and nine months ended September 30, 2009. The unaudited filing reports FIS’s Financial Solutions, Payment Solutions, International Solutions, and Corporate and Other segments. Metavante’s results were not included in the quarter; its merger with FIS closed October 1, 2009.
Financial performance
| Metric | Q3 2009 | Q3 2008 | Nine months 2009 | Nine months 2008 |
|---|---|---|---|---|
| Processing and services revenue | $850.7 million | $884.0 million | $2,483.3 million | $2,584.0 million |
| Gross profit / margin | $250.2 million / 29.4% | $222.2 million / 25.1% | $682.9 million / 27.5% | $599.5 million / 23.2% |
| Operating income / margin | $135.7 million / 16.0% | $119.8 million / 13.6% | $335.0 million / 13.5% | $228.9 million / 8.9% |
| Net earnings attributable to FIS | $67.6 million | $43.6 million | $159.8 million | $186.0 million |
| Diluted EPS attributable to FIS | $0.35 | $0.23 | $0.83 | $0.96 |
- Q3 revenue declined 3.8% year over year; nine-month revenue declined 3.9%. Management cited unfavorable foreign exchange, weaker software license and professional-services revenue, lower transaction volumes, and unusually strong comparable-period license, interchange, and card-marketing revenue.
- Gross and operating margins improved, which management attributed to cost reductions, improved efficiency, and lower prior-year restructuring, integration, and stock-compensation charges. Q3 SG&A increased to $92.2 million from $79.9 million, primarily due to Metavante merger costs.
- Nine-month net earnings comparisons are affected by discontinued operations: 2008 included $118.6 million of discontinued-operations earnings attributable to FIS, including LPS before its 2008 spin-off. Continuing-operations earnings attributable to FIS were $161.5 million in 2009 versus $67.4 million in 2008; diluted continuing-operations EPS was $0.84 versus $0.35.
- Interest expense fell to $33.2 million in Q3 and $97.0 million for nine months, from $47.7 million and $130.1 million, respectively. Management cited lower debt and floating rates, as well as prior-year debt-cost write-offs and a debt redemption premium.
- Segment results: Financial Solutions revenue fell to $278.2 million in Q3, while operating income was $98.6 million. Payment Solutions revenue fell to $369.5 million, while operating income rose to $97.7 million. International Solutions revenue rose to $203.5 million and operating income to $26.6 million; nine-month revenue was down year over year mainly because of currency effects, but rose 8.3% excluding foreign exchange.
Cash, debt, and liquidity
- Nine-month operating cash flow was $505.0 million, compared with $398.7 million. Management said the increase excluding 2008 LPS cash flow was $243.0 million, reflecting higher earnings and working-capital management.
- Capital expenditures were $145.6 million for nine months, versus $203.8 million in 2008. Operating cash flow less reported capital expenditures was approximately $359 million; this is a simple derived measure, not company-reported free cash flow.
- At September 30, cash was $205.6 million, current assets $1,057.3 million, and current liabilities $885.9 million. Total debt was $2,143.7 million, including $195.8 million current; cash and cash equivalents included $161.2 million held in foreign jurisdictions. The revolver had $693.4 million unused.
- Debt declined from $2,514.5 million at December 31, 2008. FIS reported compliance with its credit covenants at September 30 and expected operating cash flows over the following 12 months to fund operations and debt service.
- After the quarter, the Metavante merger and related financing increased reported debt to $3,372.0 million at October 31, 2009. The arrangements included $800 million of Metavante term loans remaining, a $300 million FIS Tranche C term loan after a $200 million repayment, and a revolving-loan balance of $329.5 million. An accounts-receivable facility provided up to $145 million initially, with potential capacity up to $200 million.
Merger, outlook, risks, and unusual items
- On October 1, FIS completed its tax-free merger with Metavante. Metavante shareholders received 1.35 FIS shares per share, approximately 164.1 million FIS shares in total. FIS also issued shares to THL and FNF for approximately $200 million and $50 million, respectively. Management expected merger synergies over the next 24 months; no quantified earnings guidance is provided in the filing.
- Merger-related vesting of certain FIS awards is expected to generate approximately $30 million of compensation expense in Q4 2009. Management estimated 2009 capital spending at 5%–7% of revenue and said the merger was not expected to materially affect immediate cash operating requirements.
- Management said approximately 89% of revenue was recurring under multiyear agreements. Risks include economic and transaction-volume weakness, customer consolidation or failure, technology and pricing competition, foreign-exchange movements, substantial leverage, and the ability to integrate Metavante and realize anticipated benefits. The filing warns that integration may be delayed or savings may not be achieved.
- FIS identified potential pressure from continued bank failures and financial-market disruption. It also noted one lender failure had reduced revolver availability by an immaterial amount; the maximum liquidity loss if the largest lender defaulted was estimated at about $93 million.
- FIS and Bradesco were discussing with Santander the terms of a possible exit from the Brazilian card-processing joint venture after Santander expressed a desire to move operations to its own platform.
- Contingencies include a Metavante shareholder case with a nonmaterial settlement subject to court approval; a settled Certegy class action awaiting approval; pending appeals in Driver’s Privacy Protection Act litigation; an FCRA class action FIS says it is defending; and a Lehman-related dispute over a Metavante interest-rate swap. The bankruptcy court ordered payments alleged to total $11.8 million through Q3 2009; Metavante appealed in Q4.
- FIS agreed to sell ClearPar after quarter-end; the estimated financial effect was not material. The filing states there were no material changes to contractual obligations as of quarter-end and no off-balance-sheet arrangements.
Most important facts for investors to verify
- Whether Metavante integration delivers the expected cost and revenue synergies, and how the approximately $30 million Q4 compensation charge affects reported results.
- Post-merger leverage, debt maturities and covenants, cash generation, and the capacity and use of the receivables facility.
- Whether revenue trends and margins persist, particularly in Financial and Payment Solutions, and how much international growth remains after currency effects.
- Developments in the Brazilian joint venture discussions and the disclosed litigation, especially the Lehman swap dispute.
- How discontinued operations and the LPS spin-off affect year-over-year comparisons; the filing cautions that periods may not be directly comparable.