FIS Q1 2021 10-Q Summary
Reporting period: Three months ended March 31, 2021; comparisons are with Q1 2020 unless noted. FIS provides payment, banking and capital-markets technology and services through Merchant Solutions, Banking Solutions, Capital Market Solutions, and Corporate and Other.
Financial performance
| Metric | Q1 2021 | Q1 2020 | Change |
|---|---|---|---|
| Revenue | $3.223 billion | $3.078 billion | Up 5% |
| Gross profit / margin | $1.105 billion / 34% | $989 million / 32% | Margin up 2 percentage points |
| Operating income / margin | $99 million / 3% | $108 million / 4% | Income down $9 million |
| Net income (loss) attributable to FIS common stockholders | $(373) million | $15 million | Loss of $0.60 per diluted share versus earnings of $0.02 |
| Adjusted EBITDA | $1.308 billion | $1.247 billion | Up about 5% |
| Operating cash flow | $836 million | $383 million | Up $453 million |
| Capital expenditures | $298 million | $306 million | Down $8 million |
Revenue growth reflected higher Merchant card-not-present volumes, demand for newer Banking offerings, Capital Markets managed-services and recurring-revenue growth, and favorable foreign exchange. SG&A rose 14% to $1.006 billion, including $104 million of accelerated stock compensation expense under a new retirement equity program. Reported net loss was principally affected by a $528 million debt-extinguishment loss. Interest expense declined to $74 million from $80 million.
Segment results
| Segment | Revenue | Year-over-year change | Adjusted EBITDA |
|---|---|---|---|
| Merchant Solutions | $966 million | Up 3% | $451 million; margin 46.7%, up 1.5 points |
| Banking Solutions | $1.540 billion | Up 7% | $667 million; margin 43.3%, up 0.9 points |
| Capital Market Solutions | $625 million | Up 5% | $288 million; margin 46.1%, up 1.4 points |
| Corporate and Other | $92 million | Down 10% | $(98) million, versus $(55) million |
Liquidity, debt and capital allocation
At March 31, 2021, balance-sheet cash and cash equivalents were $1.039 billion; the cash-flow statement’s $3.124 billion figure also includes $2.085 billion of restricted merchant-float cash. FIS reported $4.165 billion of available liquidity, including $3.126 billion of revolving-credit capacity. Total debt outstanding was approximately $19.4 billion, with a 1.0% weighted-average interest rate. Debt was 68% fixed-rate and 32% variable-rate.
During March, FIS issued $5.5 billion of senior USD notes and used the proceeds to redeem or tender $5.1 billion of notes and repay some commercial paper. The refinancing generated the $528 million extinguishment loss but, management said, is expected to substantially reduce ongoing interest expense. The revolving facility was extended to March 2026. Cash and cash equivalents on the balance sheet fell from $1.959 billion at year-end 2020 to $1.039 billion.
Operating cash flow benefited primarily from settlement timing. FIS paid $244 million in dividends and spent $400 million on treasury-stock purchases during the quarter. A new authorization permits repurchases of up to 100 million shares; approximately 97.2 million remained available at quarter-end. The declared quarterly dividend was $0.39 per share.
Outlook, commentary and risks
- Management expected cash plus operating cash flows over the next 12 months to cover operating needs, capital expenditures and mandatory debt service. FIS said it remained committed to reducing Worldpay-related leverage and expected to reach its target leverage by year-end 2021; the filing does not provide a numerical target.
- Management said COVID-19’s impact eased as markets reopened and vaccine access improved, but lockdowns and reduced spending continued to weigh on Merchant volumes, particularly in travel, airlines and restaurants and in parts of Europe and Brazil. Merchant revenue was expected to remain affected until pandemic-related economic and travel restrictions receded.
- Worldpay revenue-synergy delivery was described as on track to meet or exceed current targets; expense synergies had exceeded the original target, with further savings expected during 2021.
- FIS had migrated approximately 76% of server compute, primarily in North America, to its cloud and targeted 80% by year-end 2021. It also planned to consolidate about five additional data centers, with approximately $5 million of additional annual run-rate expense reduction expected.
- Risks include prolonged pandemic effects, merchant defaults and chargebacks, cybersecurity incidents and service outages, integration and synergy execution, customer and industry consolidation, competition and technology change, foreign-exchange and interest-rate exposure, and potential goodwill impairment. The company said the pandemic had not materially increased its credit-loss allowance or chargeback losses to date, but future impacts could be significant or difficult to estimate.
Material items and contingencies
- Reliance Trust’s $39.8 million class-action settlement received final court approval in March 2021 and was paid in April. The company recorded the liability and related expense in 2020.
- FIS disclosed approximately $41 million of potential Brazilian tax-claim exposure across 38 claims, but said a liability was not probable and recorded no accrual.
- The company recorded a $448 million liability under the Worldpay tax receivable agreement at quarter-end. Payments may vary with tax deductions, taxable income and other assumptions.
- On April 29, 2021, after quarter-end, FIS sold its 36% Cardinal Holdings stake for approximately $367 million net cash proceeds; the sale was to be recorded in Q2.
Key facts for investors to verify
- How recurring operating performance compares with reported results after the $528 million refinancing loss and $104 million accelerated stock-compensation charge.
- Debt, commercial-paper usage, refinancing benefits and progress toward the stated year-end 2021 leverage target.
- Merchant payment-volume recovery, including exposure to travel, airlines, restaurants, lockdowns, merchant credit and chargebacks.
- Delivery of Worldpay revenue and expense synergies, and whether the planned cloud migration and data-center savings are achieved.
- Potential effects of COVID-19, goodwill assumptions, Brazilian tax claims and the tax receivable agreement on future results and liquidity.