Fidelity National Information Services, Inc. — Q2 2015 Form 10-Q
Business context and period. FIS provides banking and payments technology, processing, consulting, and outsourcing services. This unaudited filing covers the quarter and six months ended June 30, 2015, compared with the same periods in 2014. Beginning in 2015, FIS reports three segments: Integrated Financial Solutions (IFS), Global Financial Solutions (GFS), and Corporate and Other.
Financial performance
| Metric | Q2 2015 | Q2 2014 | First half 2015 | First half 2014 |
|---|---|---|---|---|
| Processing and services revenue | $1,586.8m | $1,599.1m | $3,141.6m | $3,119.4m |
| Gross profit / margin | $517.8m / 32.6% | $506.6m / 31.7% | $1,002.3m / 31.9% | $982.5m / 31.5% |
| Operating income / margin | $287.0m / 18.1% | $309.7m / 19.4% | $502.1m / 16.0% | $595.8m / 19.1% |
| Net earnings attributable to FIS | $240.2m | $178.8m | $351.1m | $333.3m |
| Diluted EPS attributable to FIS | $0.84 | $0.62 | $1.23 | $1.15 |
| Operating cash flow | Not separately presented | Not separately presented | $442.5m | $479.1m |
- Q2 revenue decreased about 0.8% year over year; first-half revenue increased about 0.7%. Revenue included unfavorable foreign-exchange impacts of approximately $63m for Q2 and $109m for the first half. Excluding currency effects, FIS reported revenue growth, supported by acquisitions, consulting demand, and processing volumes, partly offset by lower termination fees.
- Gross margins improved, but operating income and margins declined as lower termination fees, higher acquisition and integration costs, and first-quarter restructuring costs weighed on results. First-half SG&A rose to $500.2m from $386.7m and included $44.6m of GFS severance costs.
- Reported earnings benefited from a $140.4m pretax gain on the sale of gaming check-warranty assets. The gain was included in continuing operations; a $90.1m write-off of goodwill with no tax basis related to the sale contributed to higher effective tax rates (39% Q2; 37% first half, versus 30% and 32%). The filing does not provide a clear adjusted earnings measure excluding these items.
- Net interest expense declined to $35.8m in Q2 and $73.2m in the first half, from $41.9m and $83.0m, respectively, largely reflecting lower borrowing rates after 2014 refinancing.
Balance sheet, cash flow, and capital
- At June 30, 2015, cash and equivalents were $446.4m; total debt was $5,043.3m, implying net debt of approximately $4.60bn. Long-term debt excluding current maturities was $5,029.8m. The $3.0bn revolving facility had $775m drawn and approximately $2,224.2m available, net of letters of credit.
- First-half operating cash flow was $442.5m, down from $479.1m. Investing cash flow was positive $23.1m, including asset-sale proceeds; financing cash flow was negative $483.8m, including $300.4m of treasury-stock purchases and $146.5m of dividends paid.
- Capital expenditures, excluding capital leases, were $218.6m in the first half. Management expected 2015 capital expenditures of approximately 5%–6% of revenue and stated cash, together with expected operating cash flow, should fund operating needs, capital expenditures, and mandatory debt service over the next 12 months.
- FIS paid a quarterly dividend of $0.26 per share, following an 8% increase effective in Q1. It repurchased $300.4m of shares in the first half; $1,224.1m remained under its authorization at June 30.
- Approximately $239.1m of cash was held by foreign entities and would generally be subject to U.S. income taxation upon repatriation. FIS noted that most domestic cash balances reflected settlement-related deposits in transit.
Segments and material changes
- IFS: Q2 revenue was $968.9m, essentially flat; first-half revenue rose to $1,937.8m from $1,905.9m. First-half operating income was nearly flat at $647.4m. Lower termination fees pressured margins.
- GFS: Q2 revenue was $618.9m versus $630.6m; first-half revenue was $1,205.8m versus $1,214.1m. Unfavorable currency effects were approximately $63m in Q2 and $108m in the first half. First-half operating income declined to $128.4m from $153.0m, reflecting currency, a greater mix of lower-margin consulting and professional services, and restructuring, partly offset by expense management.
- FIS completed its sale of certain gaming check-warranty assets during Q2 and closed the sale of its China eCas business. It also finalized an operating reorganization in March and incurred the $44.6m GFS severance charge. Clear2Pay and Reliance acquisitions contributed to 2015 revenue comparisons.
Outlook, risks, and contingencies
- Management anticipated unfavorable foreign-exchange effects would continue through the remainder of 2015 but could not estimate their magnitude. International revenue grew on a constant-currency basis, while consulting and outsourcing demand were identified as opportunities.
- Management cited mobile-payment innovation as both an opportunity and a risk, alongside cybersecurity threats, competition, banking-industry consolidation, declining check use, and regulatory and technology changes. It expected lower consolidation activity and related termination fees to remain a factor; the filing does not provide formal earnings or revenue guidance.
- Interest-rate sensitivity: a 100-basis-point LIBOR increase would raise annual debt service by an estimated $13.8m after swaps, based on June 30 debt balances. FIS had $700m of interest-rate swaps outstanding, with a $300m swap scheduled to terminate July 1, 2015.
- Brazilian tax authorities’ claims involving Servicos and Prosegur totaled approximately $61.4m across 33 claims. FIS said a liability was possible but not probable or reasonably estimable and recorded no liability. Separately, approximately 740 active Brazilian labor claims remained; the accrued liability, net of court-ordered deposits, was $13.7m.
- Patent litigation remained pending, including appeals of patent-review decisions favorable to FIS; management said possible losses could not be estimated. FIS reported no material change to previously disclosed risk factors, no off-balance-sheet arrangements, and effective disclosure controls.
Important facts for investors to verify
- How much of reported earnings growth is sustainable after excluding the asset-sale gain and considering the related goodwill write-off and tax effects.
- Whether organic, constant-currency growth and segment margins improve as restructuring and expense initiatives take effect, particularly in GFS.
- Cash conversion, capital spending, buybacks, and dividends relative to debt maturities, floating-rate exposure, and available revolver capacity.
- Developments in foreign exchange, Brazilian claims, and the patent cases, as well as the timing and effects of the July 2015 swap expiration.