FIS 2019 Q1 Form 10-Q Summary
Reporting period: Three months ended March 31, 2019; unaudited. Amounts are in U.S. dollars. FIS provides financial technology and processing services across banking, payments, capital markets, asset management, and wealth and retirement markets. Its reporting segments are Integrated Financial Solutions (IFS), Global Financial Solutions (GFS), and Corporate and Other.
Financial performance
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Revenue | $2.057 billion | $2.066 billion | Down 0.5% |
| Gross profit / margin | $676 million / 32.9% | $652 million / 31.6% | Margin up 1.3 percentage points |
| Operating income / margin | $315 million / 15.3% | $294 million / 14.2% | Income up 7.1% |
| Net earnings attributable to FIS common stockholders | $148 million | $182 million | Down 18.7% |
| Diluted EPS | $0.45 | $0.54 | Down 16.7% |
| Cash from operating activities | $294 million | $354 million | Down $60 million |
| Cash and cash equivalents, March 31 | $576 million | $725 million at March 31, 2018 | Down $149 million |
Gross profit improved despite slightly lower revenue, reflecting favorable revenue mix and cost-management initiatives. Profit after operations declined mainly as total other expense rose to $127 million from $69 million. That included $75 million of net interest expense and $52 million of other expense; the filing says 2019 other expense included financing costs related to the pending Worldpay acquisition. Effective tax rates were 17.0% versus 15.1%.
Operating cash flow fell primarily because of lower net earnings and working-capital timing. Cash used in investing activities was $143 million; cash used in financing activities was $275 million, including $400 million of treasury-stock purchases and $113 million of dividends. Cash decreased by $127 million during the quarter.
Balance sheet, debt and liquidity
- Total assets were $24.1 billion and total liabilities were $14.2 billion at March 31, 2019. Current assets were $3.6 billion and current liabilities were $3.5 billion.
- Debt was approximately $9.2 billion, including $600 million of commercial paper and current maturities; cash was $576 million. FIS reported $8.6 billion of long-term debt excluding current maturities.
- The $4.0 billion revolving credit facility had $88 million outstanding and $3.906 billion of remaining capacity, net of letters of credit. Commercial paper outstanding carried a 2.79% weighted-average rate.
- Management expected cash and operating cash flows over the next 12 months to cover operating needs, capital expenditures, and mandatory debt service. Approximately $308 million of cash was held by foreign entities.
- FIS reported a 3.3% weighted-average cost of debt and 7.1-year weighted-average maturity; 86% of debt was fixed-rate. A 100-basis-point increase in rates on floating-rate debt was estimated to raise annual interest expense by $13 million.
Material changes and segment results
- IFS: Revenue rose 6.4% to $1.129 billion and adjusted EBITDA rose 10.6% to $499 million. Growth came from payments, banking and wealth, termination fees, and corporate and digital solutions. Adjusted EBITDA margin increased to 44.1%.
- GFS: Revenue fell 6.9% to $863 million, affected by the Brazilian Venture unwind, weaker institutional and wholesale and international banking revenue, and approximately $25 million of adverse currency impact. Adjusted EBITDA increased 1.3% to $309 million; margin rose to 35.8%.
- Corporate and Other: Revenue fell 17.3% to $65 million, primarily following the Certegy Check Services divestiture. Adjusted EBITDA declined to negative $79 million from negative $51 million.
- Consolidated revenue was affected by the Brazilian Venture unwind, prior divestitures, GFS declines, and $26 million of unfavorable foreign-currency translation. These impacts were partly offset by IFS growth.
- Share repurchases totaled $400 million in January; FIS said it had made no repurchases since January 24 and had suspended repurchases because of the Worldpay transaction. The quarterly dividend was $0.35 per share.
Outlook, transaction and risks
- FIS agreed on March 17, 2019 to acquire Worldpay for approximately 289 million FIS shares plus $3.4 billion in cash, subject to adjustments. The transaction implied an enterprise value of approximately $43 billion, including assumed or repaid Worldpay debt. FIS expected closing in Q3 2019, subject to shareholder, regulatory, and other approvals; there was no financing condition.
- FIS arranged a $9.5 billion bridge commitment, with the amendment tranche reduced to zero after revolving-facility changes. It intended to replace the $7.5 billion capital-markets tranche with permanent financing. The company estimated approximately $11.1 billion of acquisition-related debt financing at closing. Financing availability and terms, leverage, integration, synergies, and transaction completion are significant uncertainties.
- FIS forecast approximately $45 million of adverse revenue impact from foreign-currency translation for full-year 2019, subject to exchange-rate uncertainty. It provided no clear numerical full-year earnings guidance in the supplied filing text.
- Management reported that about 50% of server compute had moved to its cloud and targeted 65% by year-end 2019 and 80% by year-end 2021. Data-center consolidation had generated more than $100 million of annualized expense reductions by year-end 2018; FIS targeted a further approximately $150 million of annualized reductions from planned closures through 2021.
- Key business risks include cybersecurity and service disruptions, competition and technology change, customer attrition, regulatory and privacy requirements, foreign-exchange exposure, and banking-industry consolidation. Worldpay-related risks include regulatory approval, integration, anticipated synergies, increased debt, payment-network rules and fees, merchant competition, and international exposure, including Brexit.
- Contingencies included a Reliance Trust class action alleging approximately $115 million in damages; FIS said loss was not probable and had not accrued a liability. Brazilian tax claims totaled potential exposure of approximately $64 million; FIS likewise did not consider a liability probable and recorded none. A separate $64 million liability, largely for tax matters, was recorded for contingencies assumed in the SunGard acquisition.
- FIS adopted lease accounting Topic 842 on January 1, 2019, recognizing $442 million of operating-lease right-of-use assets and $446 million of lease liabilities at adoption, with no impact on earnings or cash flows. Disclosure controls were concluded effective, and no material change in internal control over financial reporting was reported.
Important facts for investors to verify
- Worldpay’s approval and closing status, final consideration and financing, resulting debt and dilution, and realized integration costs and synergies.
- Whether IFS growth and margin gains can offset GFS weakness, divestitures, foreign-exchange pressure, and the Brazilian business transition.
- Cash-flow and working-capital trends, debt maturities and refinancing needs, and the ability to maintain dividends while financing the acquisition.
- Progress toward cloud and data-center targets, and whether stated annualized savings are achieved without service, security, or client-retention problems.
- Developments in the disclosed legal and tax matters, along with evolving cybersecurity, privacy, payment-network, and regulatory risks.