Fidelity National Information Services, Inc. — Q2 2021 Form 10-Q
Reporting period: Three and six months ended June 30, 2021. FIS provides technology and payment processing services to merchants, banks and capital-markets firms through Merchant Solutions, Banking Solutions, and Capital Market Solutions.
Financial performance
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Revenue | $3.475 billion | $2.962 billion | $6.699 billion | $6.039 billion |
| Gross profit / margin | $1.340 billion / 39% | $916 million / 31% | $2.446 billion / 37% | $1.905 billion / 32% |
| Operating income / margin | $363 million / 10% | $46 million / 2% | $463 million / 7% | $154 million / 3% |
| Net earnings (loss) attributable to FIS common stockholders | $341 million | $19 million | $(32) million | $35 million |
| Diluted EPS | $0.55 | $0.03 | $(0.05) | $0.06 |
| Operating cash flow | Not presented quarterly in the supplied filing text | $1.864 billion | $1.613 billion |
Q2 revenue rose 17%; six-month revenue rose 11%. For the first half, adjusted EBITDA was $2.827 billion versus $2.404 billion. Segment revenue growth in Q2 was 45% for Merchant, 8% for Banking and 6% for Capital Markets; Corporate and Other revenue declined 5%. FIS spent $613 million on capital expenditures in the first half, compared with $567 million a year earlier.
Liquidity, debt and capital allocation
- At June 30, cash and cash equivalents on the balance sheet were $1.301 billion. Reported available liquidity was $3.932 billion, including $2.631 billion of revolving-credit capacity. Cash-flow statement cash of $3.285 billion includes restricted merchant float.
- Total debt outstanding was approximately $19.4 billion; the weighted-average interest rate was 1.0%. Debt was 66% fixed-rate and 34% variable-rate. A 100-basis-point increase in rates on variable-rate debt was estimated to raise annual interest expense by $66 million.
- Operating cash flow increased $251 million year over year, which management attributed primarily to economic recovery, partly offset by working-capital and settlement timing. Cash and cash equivalents on the balance sheet declined from $1.959 billion at year-end 2020.
- FIS paid $486 million in dividends and spent $908 million on treasury-stock activity in the first half. It declared a $0.39 quarterly dividend and had about 94.5 million shares remaining under its 100-million-share repurchase authorization at quarter-end.
Material changes and unusual items
- Revenue and margins improved with the reopening-driven recovery in Merchant volumes, Banking sales and volumes, and Capital Markets recurring services. Favorable foreign-exchange movements also contributed to growth.
- Q2 other income included an approximately $225 million gain from the sale of FIS’s Cardinal Holdings interest and $73 million of net gains on certain equity investments. These items contributed to reported Q2 earnings.
- First-half other expense included a $528 million loss on extinguishment of debt from refinancing. FIS issued $5.5 billion of new U.S.-dollar notes and tendered or redeemed approximately $5.1 billion of existing notes; management said the refinancing should substantially reduce ongoing interest expense. Net interest expense fell to $122 million from $167 million in the first half.
- The first-half tax provision reflected a one-time net remeasurement of deferred tax liabilities following the U.K. corporate tax-rate increase. First-quarter SG&A also included $104 million of accelerated stock-compensation expense from a retirement-policy change.
- FIS sold its Cardinal Holdings interest for approximately $367 million in net cash proceeds. It also reported $19 million of direct COVID-19 costs in the first half, compared with $15 million in the prior-year period.
Outlook, risks and contingencies
Management said Worldpay revenue synergies remained on track to meet or exceed current targets, expense synergies had exceeded the original target, and additional expense synergies were expected during 2021. FIS remained committed to reducing leverage from the Worldpay acquisition and expected to reach its target leverage by year-end 2021. It expected cash, operating cash flows and available funding to cover operating needs, capital expenditures and mandatory debt service over the next 12 months. The filing provides no clear numerical earnings or revenue guidance.
Management described improving conditions as markets reopened, while noting continuing pressure on Merchant activity from travel, airlines and lockdowns in some regions. Key risks include renewed pandemic effects, merchant defaults and chargebacks, cybersecurity incidents, execution of acquisition synergies, competition and technology change, and foreign-exchange and interest-rate exposure. FIS said potential future pandemic-related chargeback losses could be significant but could not be reasonably estimated. It had not accrued liabilities for approximately $45 million of potential Brazilian tax claims because it did not consider a loss probable. A Reliance Trust settlement of $39.8 million received final court approval and was paid in April 2021.
Important facts for investors to verify
- How much reported earnings depended on the Cardinal divestiture and investment gains, and what underlying earnings and margins look like after unusual items.
- Progress toward the year-end 2021 leverage target, debt maturities and the effect of variable-rate exposure.
- Whether the improvement in Merchant volumes and margins persists as pandemic restrictions and travel-related weakness evolve.
- Realization of Worldpay revenue and expense synergies, and the execution and costs of ongoing technology and data-center investments.
- Developments in merchant chargeback exposure, COVID-19 impacts, Brazilian tax claims and other contingencies.