Fidelity National Information Services, Inc. — Q1 2011 Form 10-Q
Reporting period: Three months ended March 31, 2011; unaudited. FIS provides banking and payments technology and reports Financial Solutions (FSG), Payment Solutions (PSG), International Solutions (ISG), and Corporate and Other. The comparison is with Q1 2010.
Financial performance
| Metric | Q1 2011 | Q1 2010 | Change / context |
|---|---|---|---|
| Processing and services revenue | $1,383.4 million | $1,235.0 million | Up 12.0%, reflecting acquisitions, professional services and processing growth |
| Gross profit / margin | $387.4 million / 28.0% | $344.6 million / 27.9% | Margin broadly stable |
| Operating income / margin | $213.9 million / 15.5% | $187.4 million / 15.2% | Higher income and margin |
| Continuing earnings attributable to FIS | $96.1 million | $97.1 million | Approximately flat |
| Net earnings attributable to FIS | $92.8 million | $93.6 million | Down slightly; includes discontinued-operation losses |
| Diluted EPS | $0.30 total; $0.31 continuing | $0.25 total; $0.26 continuing | Higher per-share earnings despite nearly flat earnings, principally with fewer weighted-average shares |
| Operating cash flow | $260.2 million | $271.6 million | Down $11.4 million, primarily from working-capital timing |
| Capital expenditures | $71.6 million | $58.2 million | Higher, including software investment |
Liquidity, debt and capital
- Cash and cash equivalents were $384.1 million at March 31, 2011, versus $338.0 million at year-end; about $216.4 million was held by foreign entities.
- Total debt was $5,012.2 million, down from $5,192.1 million at December 31, 2010. Current debt was $577.0 million; long-term debt was $4,435.2 million. The current portion rose substantially, primarily reflecting scheduled maturities.
- FIS reported $831.0 million of remaining revolving borrowing capacity, net of letters of credit, and compliance with credit agreement covenants. The filing states operating cash flows are expected to cover operating needs and debt service over the next 12 months.
- Cash increased by $46.1 million during the quarter. Financing cash flow was a $140.1 million use, including $2,912.7 million of debt repayments and $16.0 million in dividends and other distributions.
- The quarterly dividend was $0.05 per share. Management expected to continue it, subject to board discretion and debt restrictions. FIS expected 2011 capital expenditures of approximately 6% of revenue.
Material changes and segment results
- The 2010 leveraged recapitalization funded a $2.5 billion tender offer repurchase of 86.2 million shares. This sharply reduced weighted-average shares, while higher debt and interest rates increased Q1 2011 net interest expense to $68.0 million from $28.2 million.
- FSG revenue rose to $503.7 million from $443.5 million; operating income was $156.2 million versus $148.6 million. Its margin fell to about 31.0% from 33.5%, partly due to a higher share of lower-margin professional services, including Capco-related business.
- PSG revenue declined to $614.5 million from $618.8 million and operating income to $196.0 million from $204.8 million. Lower item-processing and retail-check activity, a $16.6 million unfavorable revenue presentation impact from merchant-platform consolidation, less favorable mix and integration costs weighed on results.
- ISG revenue increased to $268.1 million from $180.4 million and operating income to $30.5 million from $19.6 million, primarily due to Capco, Brazil card volumes, professional services and license revenue.
- Capco, acquired in December 2010, expanded consulting capabilities. Management cautioned that its lower-margin professional services could compress margins and reduce the proportion of recurring revenue.
Outlook, risks and unusual items
- Management described the broader economic recovery cautiously, while expecting continued bank technology investment and further bank consolidation and failures during 2011. Consolidation can either create business or cause FIS to lose customers; intensified failures could also affect revenue.
- New Dodd-Frank and Durbin-related requirements could require product changes or investment and could alter customer practices, transaction volumes or demand. FIS also cited competition, technology change, customer consolidation, acquisition integration and substantial leverage as risks.
- FIS recorded a $13.0 million Q1 loss from unauthorized activities involving one client and 22 prepaid-card accounts on its Sunrise platform. It said 7,170 accounts may have been at risk and three cardholders’ non-public information may have been disclosed. The investigation continued with federal law enforcement; further costs, liability or disclosures could arise.
- Brazilian Participacoes operations were classified as discontinued while FIS pursued strategic alternatives. They generated $9.6 million revenue and a $4.8 million pretax loss in Q1 2011; the after-tax discontinued-operations loss was $3.3 million. The comparable total discontinued-operations loss was $3.5 million.
- A putative class action alleges Fair Credit Reporting Act disclosure violations. An interlocutory appeal was denied in Q1 and discovery continued; FIS said a possible loss or range could not be estimated. Separately, the U.S. Supreme Court denied a former customer’s petition in a matter involving a prior $12.1 million ruling in FIS’s favor.
- A 100-basis-point increase in LIBOR was estimated to raise annual debt service by $1.7 million after swaps. The filing reports no off-balance-sheet arrangements. Disclosure controls were deemed effective, with no material quarterly change in internal control over financial reporting.
Investor verification priorities
- Assess whether revenue growth and operating improvement can continue, particularly after separating acquisition contributions, professional-services growth and the merchant interchange accounting presentation change.
- Monitor the Sunrise investigation, potential additional losses or disclosure obligations, customer response and the effectiveness of enhanced controls.
- Review debt maturities and refinancing needs, including scheduled principal payments of $544.1 million in 2012 and $1,217.2 million in 2014, alongside available revolver capacity and covenant headroom.
- Track cash conversion, working-capital timing, capital spending against the approximately 6%-of-revenue expectation, and the sustainability of the dividend.
- Follow the Brazilian discontinued-operation strategic process and the FCRA litigation; the filing provides no clear estimate of potential loss in that litigation.