Fidelity National Information Services, Inc. — Q2 2011 Form 10-Q
Reporting period: Three and six months ended June 30, 2011; filed August 4, 2011. Unless stated otherwise, financial amounts are in millions of U.S. dollars.
Business context
FIS provides banking and payments technology, processing, software and related services. It reports Financial Solutions (FSG), Payment Solutions (PSG), International Solutions (ISG), and Corporate and Other. Recurring services historically generate more than 80% of revenue. The December 2010 Capco acquisition expanded consulting and transformation services, but management notes that this business has lower margins and reduces the recurring-revenue mix.
Financial results and liquidity
| Metric | Q2 2011 | Q2 2010 | First half 2011 | First half 2010 |
|---|---|---|---|---|
| Revenue | $1,441.7 | $1,271.0 | $2,825.1 | $2,506.0 |
| Gross profit / margin | $434.2 / 30.1% | $377.8 / 29.7% | $821.6 / 29.1% | $722.4 / 28.8% |
| Operating income / margin | $258.9 / 18.0% | $184.1 / 14.5% | $472.8 / 16.7% | $371.5 / 14.8% |
| Net earnings attributable to FIS | $123.5 | $89.9 | $216.3 | $183.5 |
| Diluted EPS attributable to FIS | $0.40 | $0.23 | $0.70 | $0.48 |
| Net interest expense | $65.8 | $19.3 | $133.8 | $47.5 |
- First-half operating cash flow was $523.5, up from $445.2. Investing cash flow was negative $146.4 and financing cash flow was negative $297.4. Cash increased to $427.3 from $338.0 at year-end 2010.
- At June 30, total debt was $4,884.4, down from $5,192.1 at December 31, 2010; cash was $427.3. Current debt was $564.4, including substantial scheduled principal payments. The filing lists $540.4 due in 2012 and $1,217.2 in 2014. Long-term debt excluding current portion was $4,320.0.
- Revolving facilities had $907.0 of borrowing capacity available, net of letters of credit. FIS reported compliance with credit-agreement covenants. Current assets were $1,705.6 and current liabilities $1,615.5.
- First-half capital expenditures were $139.6. Management expected 2011 capital expenditures, including acquisition integration spending, to be approximately 6% of revenue.
Material changes versus prior comparable periods
- Q2 revenue rose 13.4%; first-half revenue rose 12.7%. Management attributed growth mainly to 2010 acquisitions, professional services demand and processing revenue. Foreign currency contributed $27.4 to Q2 and $37.4 to first-half ISG revenue growth.
- Operating income and margins improved, reflecting higher revenue and lower SG&A compared with 2010, when restructuring, integration and recapitalization costs were higher.
- Interest expense increased sharply because of higher debt and interest rates following the 2010 leveraged recapitalization. That recapitalization also reduced weighted-average shares substantially, affecting EPS comparability.
- Q2 and first-half results included discontinued-operation losses of $5.8 and $9.1, respectively. PSG revenue was broadly flat; a change to net recognition of certain merchant interchange fees reduced reported revenue by $17.8 in Q2 and $34.4 in the first half, without a comparable reduction in operating income.
Segments, outlook and notable items
- Q2 FSG revenue was $516.5 and operating income $168.8; revenue growth included Capco and professional services, while margins were lower due in part to the higher professional-services mix.
- Q2 PSG revenue was $632.0 and operating income $216.3. Card and electronic payment growth was offset by lower check-related activity and the merchant-fee accounting change.
- Q2 ISG revenue was $293.0 and operating income $41.5. Capco, Brazil card volumes, professional services, license revenue and favorable currency effects supported growth; lower-margin business mix pressured segment margins.
- Management said operating cash flow was expected to cover operating needs and debt service over the next 12 months, and expected to continue the quarterly $0.05 dividend, subject to board discretion and debt restrictions. No specific revenue or earnings guidance is provided.
- FIS recorded a $13.0 first-quarter loss tied to unauthorized activity involving one client and 22 prepaid card accounts on its Sunrise platform. Approximately 7,200 accounts may have been at risk, and three cardholders’ non-public information may have been disclosed. The company reported no further loss-causing activity in Q2, said it completed its investigation, and described added security measures.
- FIS expects approximately two years of continued exposure to labor claims associated with its Brazilian Participacoes operation, whose processing volume was transitioned during Q2. The filing gives no clear estimate of potential loss. A disclosed FCRA lawsuit remains in discovery; the company said a possible loss or range could not be estimated.
- Key risks cited include substantial leverage and debt maturities, interest-rate and foreign-currency exposure, security incidents, regulatory changes including the Durbin Amendment, customer consolidation, competition, and acquisition integration. In August 2011, after quarter-end, FIS said it was no longer considering an offer for Misys.
Important facts for investors to verify
- How much of revenue and operating improvement is organic versus attributable to acquisitions, foreign exchange and accounting presentation changes.
- Ability to meet or refinance the scheduled debt payments, particularly the 2012 and 2014 maturities, and sensitivity to variable interest rates.
- Progress and any additional costs or customer impacts from the Sunrise incident and related security controls.
- Potential exposure and resolution timeline for Brazilian labor claims and the FCRA litigation.
- Whether lower-margin Capco and professional-services growth, Durbin-related changes, or payment and check-volume trends affect future margins and transaction revenue.