Fidelity National Information Services, Inc. — Q3 2012 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2012. Unaudited consolidated results; amounts are in millions of dollars except per-share data.
Business context and financial performance
FIS provides banking and payments technology, processing, software and outsourcing services through Financial Solutions Group (FSG), Payment Solutions Group (PSG), International Solutions Group (ISG), and Corporate and Other. Recurring services historically represented more than 80% of revenue.
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Processing and services revenue | $1,436.9 | $1,398.2 | $4,307.5 | $4,164.3 |
| Gross profit / margin | $468.1 / 32.6% | $432.9 / 31.0% | $1,368.1 / 31.8% | $1,233.3 / 29.6% |
| Operating income / margin | $287.9 / 20.0% | $273.2 / 19.5% | $793.1 / 18.4% | $737.5 / 17.7% |
| Continuing earnings attributable to FIS | $147.8 | $143.4 | $395.1 | $363.5 |
| Diluted EPS from continuing operations | $0.50 | $0.47 | $1.33 | $1.18 |
| Net earnings attributable to FIS, including discontinued operations | $86.8 | $136.3 | $324.5 | $352.6 |
| Operating cash flow | Not presented for quarter | Not presented for quarter | $718.0 | $799.1 |
Revenue rose 2.8% for the quarter and 3.4% year to date. Revenue growth reflected transaction and processing growth and demand for professional and consulting services, partly offset by lower item processing and retail check activity. A stronger U.S. dollar reduced reported revenue by $37.6 in Q3 and $83.0 year to date.
Gross and operating margins improved overall, which management attributed to operating leverage and cost initiatives. Q3 segment operating income was $183.6 for FSG, $213.1 for PSG and $53.4 for ISG. FSG margin declined year over year amid lower-margin revenue mix and greater security and infrastructure spending; PSG and ISG margins improved.
Cash, debt and capital allocation
- At September 30, cash and cash equivalents were $576.6, compared with $415.5 at December 31, 2011; approximately $405.5 was held by foreign entities. Current assets were $1,875.4 and current liabilities $1,210.8.
- Total debt was $4,532.0, down from $4,809.8 at year-end 2011. Cash less total debt was approximately $3,955.4. The company had $904.2 of remaining revolver capacity, net of letters of credit.
- Nine-month operating cash flow was $718.0. Investing cash flow was positive $67.2, including $336.5 in proceeds from the Healthcare Benefit Solutions sale. Capital expenditures, excluding capital leases, were $226.3.
- Financing cash use was $623.3, including $176.4 in dividends and $285.8 in treasury stock purchases. The quarterly dividend increased from $0.05 to $0.20 per share in 2012; the company repurchased $99.8 of stock in Q3.
- FIS reported that operating cash flows over the next 12 months were expected to cover operating requirements and debt service. Management expected 2012 capital expenditures of approximately 5–6% of revenue.
Material changes, outlook and notable items
- Healthcare business sale: FIS sold its Healthcare Benefit Solutions Business on August 15 for $336.5 cash proceeds. The $22.0 pretax gain was more than offset in discontinued operations by $78.3 of sale-related tax expense, resulting in a $56.2 Q3 discontinued-operations loss. Total discontinued-operations losses were $61.0 for Q3 and $70.6 year to date; consequently, reported net earnings attributable to FIS fell despite growth in continuing earnings.
- Tax outlook: Management anticipated an approximately 33% effective tax rate for full-year 2012.
- Customer consolidation: The M&I Bank/BMO Harris combination had been expected to reduce annual EBITDA run rate by about $60. Management said the 2013 impact was now expected to be substantially offset by termination and settlement fees, additional professional services and other anticipated activity with BMO Harris.
- Brazil labor claims: About 1,700 active claims remained from the shutdown of former Brazilian operations. FIS accrued $39.9 for active and unasserted claims considered probable; further claims may be filed, and the company expects continued exposure.
- Cybersecurity: The 2011 intrusion resulted in approximately $13.0 of unauthorized ATM transactions. FIS described security enhancements and an ongoing regulatory and independent-review process; a further third-party investigation was expected to conclude in the coming months. The company said it could not predict the effect of future regulatory or client actions.
- Litigation: The FCRA class-action settlement received final court approval in September and became effective October 29; its recorded liability was not material. A separate patent dispute was ongoing, and FIS said a possible loss or range could not be estimated at that stage.
- Other unusual costs: Nine-month SG&A included $18.5 of executive-related compensation charges. The nine-month other-expense line included debt refinancing costs and a write-off of previously capitalized debt costs.
Management cited cautious expectations for broad economic recovery, continuing technology investment by banks, and ongoing migration toward outsourced services. Risks include financial-institution consolidation, transaction-volume changes, competition and pricing, security incidents, regulation, foreign exchange and leverage. The filing states that disclosure controls were effective and no material quarterly change to internal control over financial reporting occurred.
Important facts for investors to verify
- How much of the improvement in continuing earnings and margins is sustainable, particularly given segment mix, security spending and consulting growth?
- What cash proceeds from the Healthcare sale remain available after debt service, dividends, repurchases and other uses, and how will the sale affect ongoing revenue and earnings?
- How will Brazilian labor-claim exposure develop relative to the $39.9 accrual?
- What are the findings and potential client or regulatory consequences of the independent investigation into the 2011 cyber-incident?
- Can FIS maintain its dividend and planned capital spending while managing $4.532 billion of debt and contractual principal payments?