Fidelity National Information Services, Inc. — Q2 2010 Form 10-Q
Reporting period: Three and six months ended June 30, 2010. Amounts are in U.S. dollars; financial statement amounts are in millions unless noted. Results are unaudited. FIS provides banking and payment technology and reports Financial Solutions, Payment Solutions, International Solutions, and Corporate and Other segments. The October 2009 Metavante acquisition materially affects comparisons with 2009.
Financial performance
| Metric | Q2 2010 | Q2 2009 | First half 2010 | First half 2009 |
|---|---|---|---|---|
| Revenue | $1,286.1 | $829.2 | $2,535.7 | $1,623.3 |
| Gross profit / margin | $373.9 / 29.1% | $206.4 / 24.9% | $716.3 / 28.2% | $382.1 / 23.5% |
| Operating income / margin | $176.9 / 13.8% | $113.4 / 13.7% | $360.7 / 14.2% | $193.2 / 11.9% |
| Net earnings attributable to FIS common stockholders | $89.9 | $59.2 | $183.5 | $92.2 |
| Diluted EPS attributable to FIS common stockholders | $0.23 | $0.31 | $0.48 | $0.48 |
| Operating cash flow | Not presented by quarter | $445.2 | $331.1 |
Q2 revenue increased 55.1% and first-half revenue 56.2%, primarily from Metavante, with contributions from software and professional services, transaction volumes, and currency translation. FIS attributed gross-margin improvement to acquisition synergies and cost efficiencies. Q2 operating margin was nearly flat year over year; first-half margin improved. Although attributable net earnings rose, Q2 diluted EPS declined as the weighted-average diluted share count increased substantially following the acquisition. Continuing-operations diluted EPS was $0.23 for Q2 and $0.48 for the first half.
Cash, liquidity, debt, and capital allocation
- At June 30, cash and cash equivalents were $502.0, total debt was $2,960.9 (including current debt), and total liabilities were $5,087.8. Cash included approximately $304.7 held in foreign jurisdictions.
- Undrawn revolving credit capacity was $724.8; combined undrawn capacity under the revolving loan and receivables facility was $869.8. No capital was outstanding under the receivables facility.
- First-half cash flows: operating activities provided $445.2; investing activities used $73.3; financing activities used $288.5. Capital expenditures were $134.2, and proceeds from the ClearPar sale were $71.5.
- Debt declined from $3,253.3 at December 31, 2009 to $2,960.9 at June 30. The June credit-agreement amendment extended maturities and changed pricing. On July 16, FIS issued $600 million of 7.625% notes due 2017, $500 million of 7.875% notes due 2020, and a $1.5 billion Term Loan B; it used part of the proceeds to repay the Metavante Term Loan. Pro forma debt after these transactions was approximately $5.6 billion, before giving effect to the planned share repurchase.
- The board authorized a modified Dutch-auction tender offer of up to $2.5 billion at $29–$31 per share; it ran July 6 through August 3, 2010. FIS also had a separate authorization to repurchase up to 15 million shares, of which 1.4 million had been repurchased for $32.2 million by March 31. The company paid a $0.05 quarterly dividend and approved another $0.05 dividend for September 30.
Material changes, outlook, and risks
- Metavante integration increased revenue and costs. First-half SG&A included $54.1 of integration and merger-related charges; Q2 included $49.5. Management expects incremental acquisition synergies through 2011.
- Management said approximately 85% of revenue comes from multi-year agreements and is recurring. It expects cash from operations over the next 12 months to cover operating needs and debt service, and expects 2010 capital expenditures of approximately 6% of revenue.
- Management cited economic sensitivity in transaction volumes and discretionary software and professional-services spending; ongoing decline in paper-based check activity; customer consolidation, pricing and renewal pressure; competition and technology change; and possible bank failures. Management also noted that the Dodd-Frank Act’s prospective debit interchange and network rules could affect the business, but the impact was unclear pending regulations.
- Brazilian venture uncertainty: Santander stopped processing on the venture’s systems in January 2010. FIS recorded a $34.5 partial settlement payment as a deferred liability while negotiations continued. FIS and Bradesco later agreed in principle on continued FIS ownership and processing arrangements; definitive agreements were still being negotiated.
- Leverage increased materially after the July financing and planned recapitalization, raising debt-service, refinancing, interest-rate, and financial-flexibility risks. A 100-basis-point increase in LIBOR was estimated to increase annual debt service by $8.6, after swaps. Interest-rate swaps had $2.1 billion notional; no foreign-currency derivatives were outstanding.
- Other items: $12.8 of debt-extinguishment expense was recorded in Q2 in connection with the credit amendment. ClearPar was sold January 1, 2010 and its results are presented as discontinued operations. The filing describes ongoing FCRA and other litigation; the DPPA appeal involving Certegy was affirmed in July 2010, while the Searcy matter remained active. FIS reported effective disclosure controls and no material internal-control changes during the quarter.
Most important facts for investors to verify
- How much of reported growth and margin improvement reflects Metavante, recurring organic growth, and sustainable synergies versus integration charges?
- What were the final tender-offer share count, purchase price, and funding mix, and what is debt and liquidity after the repurchase?
- Whether the Brazilian venture settlement and Bradesco arrangements were finalized, and their effects on earnings, cash flow, and liabilities.
- How debt covenants, upcoming maturities, variable rates, and the new senior notes affect refinancing capacity and future cash available for investment and dividends.
- The eventual effect of debit-network regulation and customer transaction trends on FIS revenue, particularly given the share of transaction-based fees.