FIS 2019 Second-Quarter Form 10-Q Summary
Reporting period: Three and six months ended June 30, 2019; unaudited. Amounts are in U.S. dollars unless otherwise noted. FIS provides financial technology, processing, payments, and related services to financial institutions and other clients.
Financial performance
| Metric | Q2 2019 | Q2 2018 | First half 2019 | First half 2018 |
|---|---|---|---|---|
| Revenue | $2.112 billion | $2.106 billion | $4.169 billion | $4.172 billion |
| Gross profit | $708 million | $692 million | $1.384 billion | $1.344 billion |
| Operating income | $391 million | $353 million | $706 million | $647 million |
| Operating margin | 18.5% | 16.8% | 16.9% | 15.5% |
| Net earnings attributable to FIS common stockholders | $154 million | $212 million | $302 million | $394 million |
| Diluted EPS | $0.47 | $0.64 | $0.92 | $1.18 |
| Operating cash flow | Not separately presented | Not separately presented | $820 million | $823 million |
Q2 revenue increased 0.3% year over year; first-half revenue declined 0.1%. Gross margin improved to 33.5% in Q2 from 32.9%, and to 33.2% for the first half from 32.2%. Management attributed margin improvement principally to lower acquired-intangible amortization, favorable mix, and cost management. Adjusted EBITDA was $794 million in Q2, versus $757 million; first-half adjusted EBITDA was $1.523 billion, versus $1.462 billion.
Net income and EPS fell despite higher operating income, primarily reflecting a sharp increase in other expense. Other expense, net was $120 million in Q2 and $172 million in the first half, including acquisition financing costs and noncash foreign-currency effects on euro- and sterling-denominated notes issued for the Worldpay deal. FIS reported $15 million of second-quarter pretax loss on foreign-currency forwards. Interest expense was $72 million in Q2 and $147 million for the first half.
Segments and operating trends
- Integrated Financial Solutions (IFS): Q2 revenue rose 4.9% to $1.179 billion and adjusted EBITDA rose 8.7% to $535 million; margin increased 150 basis points to 45.3%. First-half revenue rose 5.7% and adjusted EBITDA rose 9.5%.
- Global Financial Solutions (GFS): Q2 revenue declined 3.8% to $865 million, while adjusted EBITDA declined 0.6% to $312 million. First-half revenue declined 5.4%, while adjusted EBITDA increased 0.5% to $621 million. The Brazilian Venture unwind and unfavorable currency translation weighed on revenue; mix supported margins.
- Corporate and Other: Q2 revenue fell 18.1% to $68 million and adjusted EBITDA was a loss of $53 million. First-half revenue fell 18.0% to $132 million and adjusted EBITDA was a loss of $131 million, reflecting divestitures and higher costs.
Revenue is substantially recurring and generally contracted under multiyear agreements. At June 30, remaining performance obligations were approximately $20.0 billion, excluding anticipated renewals not yet contractually obligated; FIS expected to recognize about 35% within 12 months and another 25% in months 13–24.
Liquidity, debt, and capital allocation
- At June 30, cash and cash equivalents were $9.756 billion; short-term borrowings were $1.507 billion, current long-term debt $53 million, and long-term debt excluding current maturities $16.682 billion. Management reported total debt of approximately $18.2 billion. Much of the cash balance consisted of Worldpay-related financing proceeds and settlement-related balances.
- FIS had $5.497 billion of available capacity under its revolving credit facility, net of letters of credit. It also had a Euro-commercial paper program with $1.5 billion outstanding at quarter-end. Management said cash and expected operating cash flows would cover operating needs, capital expenditures, and mandatory debt service over the next 12 months.
- First-half investing cash outflow was $284 million, including $285 million of capital expenditures excluding certain financing obligations. Financing cash inflow was $8.515 billion, principally reflecting debt issuance and borrowing activity. Dividends paid were $226 million; the quarterly dividend was $0.35 per share. FIS suspended share repurchases in connection with the Worldpay transaction.
- At June 30, 85% of debt was fixed-rate and 15% floating-rate; weighted-average debt cost was 2.5% and weighted-average maturity 7.2 years. A 100-basis-point increase in floating rates was estimated to raise annual interest expense by $27 million.
Worldpay transaction, outlook, and key risks
FIS completed its acquisition of Worldpay on July 31, 2019, after the reporting date. Worldpay shareholders received approximately 289 million FIS shares and $3.4 billion in cash; FIS also repaid approximately $7.5 billion of Worldpay debt. The transaction valued Worldpay at approximately $50 billion including that debt repayment. Legacy FIS shareholders owned approximately 53% of the combined company and former Worldpay shareholders approximately 47%. The purchase-price allocation was incomplete when this 10-Q was filed.
FIS forecast an approximately $80 million adverse full-year 2019 revenue effect from foreign-currency translation. It did not provide a clear quantified earnings outlook in the filing. It described continuing investment in innovation, security, and cloud migration: its target was to move about 65% of server compute to its cloud by year-end 2019 and about 80% by year-end 2021. Data-center consolidation had generated more than $100 million of annualized savings by year-end 2018; FIS anticipated a further approximately $150 million of annualized savings from planned consolidation through 2021.
Principal uncertainties include Worldpay integration costs and execution, realizing anticipated synergies, customer or employee attrition, significantly higher post-acquisition debt and interest burden, cybersecurity and service continuity, payment-processing competition and regulation, foreign exchange and interest-rate exposure, and international regulatory and geopolitical risks. FIS also cited potential effects of Brexit and changing privacy rules. Management stated that the Reliance Trust class action alleged approximately $115 million in damages and that Brazilian tax claims had potential exposure of approximately $64 million; FIS considered liabilities not probable and recorded no liability for those matters. It did not expect the Reliance matter to materially affect financial condition.
FIS adopted the new lease standard in 2019, recognizing operating lease right-of-use assets and liabilities of $442 million and $446 million, respectively, at adoption; the adoption did not affect reported earnings or cash flows. Management reported effective disclosure controls and no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Post-closing Worldpay purchase accounting, combined-company debt and liquidity, integration expenses, and realized cost or revenue synergies.
- Whether revenue and margin trends persist after accounting for the Brazilian Venture unwind, divestitures, foreign exchange, and termination fees.
- Cash conversion and investment needs, including deferred contract costs, capital expenditures, and settlement-related balances.
- Debt repayment plans, refinancing needs, floating-rate exposure, credit ratings, and the sustainability of dividends following the acquisition.
- Progress toward cloud and data-center targets, and whether projected savings are achieved without service disruption.
- Developments in cybersecurity, payment-network compliance, regulatory reviews, litigation, and the disclosed Brazilian tax and Reliance Trust claims.