Business context and reporting period
Fidelity National Information Services, Inc. (FIS) provides banking and payment technology, processing, software and related services. This unaudited Form 10-Q covers the three months ended March 31, 2012; comparisons are with the first quarter of 2011 unless noted. FIS reports Financial Solutions Group (FSG), Payment Solutions Group (PSG), International Solutions Group (ISG), and Corporate and Other.
Financial results and liquidity
| Metric | Q1 2012 | Q1 2011 | Change |
|---|---|---|---|
| Revenue | $1,446.9 million | $1,383.4 million | +4.6% |
| Gross profit / margin | $436.6 million / 30.2% | $387.4 million / 28.0% | Margin +2.2 percentage points |
| Operating income / margin | $229.5 million / 15.9% | $213.9 million / 15.5% | Margin +0.4 percentage points |
| Continuing-operations earnings attributable to FIS | $95.8 million; $0.32 diluted EPS | $96.1 million; $0.31 diluted EPS | Nearly flat earnings |
| Net earnings attributable to FIS | $87.1 million; $0.29 diluted EPS | $92.8 million; $0.30 diluted EPS | Down $5.7 million |
| Operating cash flow | $203.8 million | $260.2 million | Down $56.4 million |
At March 31, 2012, cash and cash equivalents were $481.7 million, total debt was $4,844.1 million (including $115.7 million current), and unused revolving capacity was $849.5 million. Cash included approximately $309.9 million held by foreign entities. Management said operating cash flows were expected to cover operating requirements and debt principal and interest over the following 12 months. Current assets were $1,767.6 million and current liabilities were $1,104.6 million.
Capital expenditures were approximately $65.0 million (cash-flow statement additions to property and software totaled $65.0 million; segment disclosure reports $66.5 million including capital leases). FIS paid a $0.20 quarterly dividend per share, versus $0.05 a year earlier, and repurchased $101.0 million of shares in January.
Material changes and segment performance
- Revenue growth reflected higher processing volumes, transaction growth and professional-services demand. Lower item processing and retail-check activity and $10.4 million of unfavorable foreign-currency effects partly offset growth.
- Gross margin improved with growth in higher-margin businesses and cost management. Operating income also benefited from improved segment results, although SG&A rose $33.6 million.
- FSG revenue rose 7.0% to $538.9 million; operating income was $168.3 million. PSG revenue rose to $630.6 million and operating income to $226.1 million, with margin improving to 35.9% from 31.9%. ISG revenue rose to $276.8 million and operating income to $33.0 million; currency effects weighed on results.
- Operating cash flow fell year over year, principally due to a $42.4 million final interest-rate-swap reset payment in February and timing of settlement activity, receivables and payables.
- Weighted-average diluted shares declined to 295.4 million from 308.7 million. The diluted EPS increase from continuing operations partly reflected the lower share count, while total net earnings were reduced by discontinued operations.
Outlook, commentary, risks and unusual items
- FIS expected 2012 capital expenditures of approximately 5%–6% of revenue, including investments in information security. It provided no specific revenue or earnings guidance in this filing.
- Recurring services historically represented more than 80% of revenue, supporting relative stability, though transaction-linked fees vary with activity. Management cited continued demand for outsourced services, electronic payments, mobile and online banking, fraud and risk products, while noting economic uncertainty and potential effects of financial-institution consolidation.
- On March 30, 2012, FIS amended and restated its credit agreement. It also issued $700 million of 5.000% senior notes due 2022. Debt refinancing costs included $12.7 million of transaction costs and a $5.7 million write-off of previously capitalized debt costs in other expense; the filing also reports an $18.4 million write-off of prior costs and capitalization of $29.3 million of other costs. Variable-rate exposure remained: a 100-basis-point LIBOR increase was estimated to raise annual debt service by $13.8 million after swaps.
- SG&A included $18.5 million of compensation charges related to executive role changes, accelerated equity vesting and a non-compete/change-in-role payment. The prior-year period included a $13.0 million loss from unauthorized activities on the Sunrise platform; FIS said no clients suffered a financial loss related to that breach.
- Brazil discontinued operations generated no revenue in Q1 2012 and recorded an $8.7 million after-tax loss. FIS recorded $11.6 million of additional labor-claim accruals; the total accrued liability was $37.6 million, and further exposure may continue.
- Regulators distributed a confidential examination report to FIS clients concerning information security, risk management and internal audit enhancements. FIS said it was addressing the requested enhancements and had seen no significant Q1 impact, while noting possible future effects.
- Disclosed litigation included a renewed class-certification motion in the Searcy FCRA case and a newly filed patent-infringement dispute with CheckFree and CashEdge, with counterclaims by FIS and Metavante. The filing said potential losses could not be estimated for either matter.
- Other risks include substantial leverage and debt covenants, cybersecurity and operational disruption, foreign-currency movements, regulatory changes including the Durbin Amendment, competitive pricing, customer consolidation, and acquisition integration. FIS reported effective disclosure controls and no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Whether revenue and margin growth are sustained, particularly in higher-margin payment and processing services, and how Capco’s lower-margin consulting mix affects profitability.
- Debt repayment, refinancing and covenant capacity; the impact of interest-rate changes after swaps; and the availability and location of cash, including foreign-held balances.
- Whether operating cash flow recovers and can support the higher dividend, planned capital investment and share repurchases.
- Progress and costs associated with regulatory information-security enhancements, and any customer or business impact from the Sunrise incident.
- Development of Brazilian labor claims and the Searcy and CheckFree/CashEdge litigation, for which potential losses were not estimable.