FIS 2017 Second-Quarter 10-Q Summary
Business context and period: Fidelity National Information Services, Inc. (FIS) provides financial-services technology, processing and outsourcing solutions. This unaudited Form 10-Q covers the quarter and six months ended June 30, 2017; financial amounts below are in millions except per-share data. FIS reports Integrated Financial Solutions (IFS), Global Financial Solutions (GFS), and Corporate and Other.
Financial performance
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Processing and services revenue | $2,341 | $2,305 | $4,596 | $4,486 |
| Gross profit | $729 | $705 | $1,401 | $1,333 |
| Gross margin | 31.1% | 30.6% | 30.5% | 29.7% |
| Operating income | $359 | $283 | $618 | $467 |
| Operating margin | 15.3% | 12.3% | 13.4% | 10.4% |
| Net earnings attributable to FIS common stockholders | $132 | $121 | $270 | $176 |
| Diluted EPS attributable to FIS | $0.40 | $0.37 | $0.81 | $0.54 |
| Adjusted EBITDA | $746 | $696 | $1,428 | $1,333 |
Q2 revenue grew 1.6% year over year; six-month revenue grew 2.5%. Management attributed growth to banking and payments volumes in Brazil and APAC, digital and corporate solutions, and post-trade derivatives, partly offset by the PS&E divestiture, lower global trading license renewals, and unfavorable currency effects. Operating and gross margins improved, with management citing cost initiatives, synergies, higher-margin item processing and, for the six-month period, higher termination fees.
- Segment performance: Q2 IFS revenue was $1,181 million and adjusted EBITDA was $469 million (39.7% margin). GFS revenue was $1,076 million and adjusted EBITDA was $331 million (30.8% margin). Corporate and Other revenue was $84 million and adjusted EBITDA was negative $54 million.
- Taxes and other items: The effective tax rate was 49% in Q2 and 43% for the first half, versus 35% in each 2016 comparable period. FIS cited nondeductible goodwill write-off related to PS&E and taxes associated with Capco assets held for sale, partly offset by stock-award tax benefits. Six-month other income included an $85 million pretax PS&E sale gain and an approximately $25 million pretax debt-redemption and refinancing charge.
Cash flow, liquidity and debt
- For the first six months, operating cash flow was $528 million, down from $820 million in 2016. FIS attributed the decrease primarily to taxes paid on the PS&E sale gain.
- Investing cash flow was positive $546 million, including $846 million of proceeds from business sales; financing cash flow was negative $990 million. Capital expenditures excluding capital leases were approximately $297 million.
- Cash and equivalents were $786 million at June 30, 2017, versus $683 million at year-end 2016. Total debt, including the current portion and net of debt issuance costs, was approximately $9.7 billion; the balance sheet reported $297 million current and $9,415 million long-term debt.
- FIS had $750 million outstanding on its $3.0 billion revolving facility, with $2,243 million of borrowing capacity remaining after letters of credit. Management said cash and expected operating cash flow over the next 12 months should cover operating requirements, capital expenditures and mandatory debt service. Approximately $565 million of cash was held by foreign entities and generally could be subject to U.S. tax upon repatriation.
- Cash dividends paid were $0.29 per share in Q2. The board approved a new authorization to repurchase up to $4.0 billion of shares through December 31, 2020; FIS also said it expected to continue quarterly dividends, subject to board discretion and applicable restrictions.
Material changes, outlook and risks
- FIS completed the $850 million sale of its Public Sector and Education business on February 1, 2017, recognizing an $85 million pretax gain. Net proceeds after taxes and transaction costs were approximately $500 million and were used to reduce debt.
- The Capco and risk-and-compliance consulting transaction closed on July 31, 2017, after quarter-end. FIS sold a majority interest for approximately $441 million net of taxes and deal costs and retained a 40% common interest before management equity; the businesses were not classified as discontinued operations.
- FIS expected to exit 2017 with an annualized SunGard cost-synergy run rate exceeding $325 million. It also anticipated minimal foreign-currency impact on 2017 net earnings. These are management expectations, not guaranteed results.
- After quarter-end, FIS issued euro- and pound-denominated notes with approximately $1.491 billion net proceeds, then repurchased approximately $2.0 billion of notes through tender offers. The company expected an approximately $161 million pretax extinguishment charge, including premiums and debt-cost write-offs. It also expected about $13 million of deferred financing costs.
- Key stated risks include acquisition integration and realization of synergies, cybersecurity and service disruption, changing technology and competition, banking-industry consolidation, regulation, international operations and foreign exchange. FIS reported no material changes to the risk factors in its 2016 Form 10-K and no legal proceedings under Part II; the notes disclose ordinary-course litigation and a Brazilian tax-claims exposure described below.
- Contingencies include Brazilian tax claims with potential aggregate exposure of approximately $70 million; FIS did not consider a loss probable or reasonably estimable and recorded no liability. A Reliance Trust ERISA class action was at an early stage, with potential losses not estimable. The balance sheet also included a $100 million liability mainly for acquired SunGard unclaimed-property and tax matters.
- FIS planned to adopt the new revenue-recognition standard on January 1, 2018 and was assessing its effects. It anticipated possible changes to gross-versus-net revenue presentation and the timing of recognizing implementation, license-renewal and software-rental revenue; the impact was not yet quantified.
Important facts for investors to verify
- How much of earnings growth reflects recurring operating improvement versus the PS&E gain, tax effects, termination fees and other unusual items.
- Whether the projected SunGard synergy run rate is achieved, and how the Capco transaction and retained interest affect future revenue, margins and cash flow.
- The post-quarter debt tender’s final cash cost and extinguishment charge, and resulting debt, interest expense and leverage.
- The actual cash available for U.S. needs, considering foreign-held cash, settlement balances, taxes and debt obligations.
- The eventual quantified impact and transition method for the 2018 revenue-recognition standard, alongside the status of disclosed legal and tax contingencies.