FIS Q3 2020 Form 10-Q Summary
Business context and reporting period. Fidelity National Information Services, Inc. (FIS) provides technology and processing services to merchants, banks and capital-markets firms. This unaudited report covers the three and nine months ended September 30, 2020. Worldpay was acquired on July 31, 2019, so year-over-year comparisons are affected by its inclusion for only part of the 2019 periods versus all of 2020. FIS also acquired a 70% interest in Virtus in January 2020.
Key financial metrics
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $3.197B | $2.822B | $9.236B | $6.991B |
| Gross profit / margin | $1.093B / 34% | $984M / 35% | $2.998B / 32% | $2.368B / 34% |
| Operating income / margin | $231M / 7% | $140M / 5% | $385M / 4% | $846M / 12% |
| Net earnings attributable to FIS common stockholders | $20M | $154M | $54M | $456M |
| Diluted earnings per share | $0.03 | $0.29 | $0.09 | $1.15 |
| Adjusted EBITDA | $1.357B | $1.192B | $3.761B | $2.714B |
| Cash from operating activities | $1.411B | Not stated for quarter | $3.024B | $1.741B |
- Q3 revenue rose 13%; nine-month revenue rose 32%, primarily reflecting Worldpay. FIS said COVID-19-related declines in Merchant payment volumes and, to a lesser extent, Banking transaction volumes offset some growth.
- Gross margin declined year over year in both periods, mainly due to higher amortization of acquired intangible assets. Nine-month operating income and margin also fell, with higher SG&A and acquisition-related costs contributing; 2019 included an $87M impairment charge that did not recur in 2020.
- Net earnings fell sharply despite revenue growth. Nine-month depreciation and amortization was $2.760B, including substantial purchase-accounting amortization. Effective tax rates were 85% for Q3 and 57% year to date; FIS cited a one-time deferred-tax remeasurement following the UK statutory tax-rate increase.
- Q3 segment revenue and Adjusted EBITDA: Merchant $1.017B and $487M; Banking $1.507B and $653M; Capital Markets $626M and $286M; Corporate and Other $47M and negative $69M. Merchant EBITDA margin declined as high-margin processing volumes remained affected by the pandemic.
Cash, debt and liquidity
- At September 30, cash and cash equivalents on the balance sheet were $1.826B; available liquidity was $4.227B, including $2.401B of unused revolving-credit capacity. Cash-flow-statement cash was $3.835B because it includes restricted cash, principally merchant float.
- Total debt was approximately $20.2B, with a weighted-average interest rate of 1.6%. Current portion of long-term debt was $1.832B and short-term borrowings were $3.144B. FIS reported remaining 2020 and 2021 contractual debt maturities of approximately $19M and $1.834B, respectively.
- Nine-month investing cash outflow was $1.215B, including $469M for acquisitions; capital expenditures were $838M excluding certain financing obligations. FIS paid $650M in dividends during the nine months and $217M in Q3.
Outlook, commentary and risks
- Management said it expected cash and operating cash flows over the next 12 months to fund operating needs, capital spending and mandatory debt service, and expected to continue quarterly dividends, subject to Board discretion. FIS remained committed to deleveraging and continued to expect to reach its target leverage in 2021. No specific earnings or revenue guidance is provided in the filing text.
- FIS expected COVID-19 expense-management actions to reduce 2020 expenses by approximately $300M, including about $220M from lower 2020 incentive compensation, which it did not expect to repeat in 2021. Worldpay revenue and expense synergies were reported on track to exceed previously announced targets, without updated quantified targets in this filing.
- COVID-19 continued to affect travel, entertainment and hospitality payment volumes and delayed some customer decisions, implementations, software licenses and professional services. Management said transaction volumes and liquidity improved during Q3 as restrictions eased and consumer refunds declined.
- Merchant credit and chargebacks remain risks: FIS extends settlement-related credit and may bear losses if merchants cannot repay or fund chargebacks. No reasonable estimate of potential future pandemic-related chargeback losses could be made. FIS also warned that a prolonged downturn could affect goodwill estimates, particularly for Merchant Solutions.
- Other notable items include a $39.8M Reliance Trust settlement liability and loss, subject to final court approval; approximately $45M of potential Brazilian tax claims for which FIS did not record a liability because it considered loss not probable; and a $543M liability under the Worldpay tax receivable agreement.
Most important facts for investors to verify
- Separate organic performance from acquisition-driven growth, particularly the Worldpay effect and the timing of the 2019 comparison.
- Track Merchant payment volumes, customer credit exposure and chargeback losses as pandemic conditions evolve.
- Review debt maturities, progress toward the 2021 leverage target, and the adequacy of available liquidity.
- Assess whether margins and earnings recover as acquired-intangible amortization, integration costs and pandemic impacts change.
- Monitor final court approval and accounting for the Reliance settlement, the Brazilian claims, and the Worldpay tax receivable and contingent value rights obligations.