FIS 10-Q Summary — Third Quarter 2019
Reporting period: Three and nine months ended September 30, 2019; filed November 5, 2019. Amounts are in U.S. dollars. FIS provides technology and payment-processing services to merchants, banks and capital-markets clients. The period includes Worldpay from its acquisition date, July 31, 2019, so year-over-year revenue comparisons are materially affected by the acquisition.
Key Financial Results
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $2.822B | $2.084B | $6.991B | $6.256B |
| Gross profit / margin | $984M / 34.9% | $720M / 34.5% | $2.368B / 33.9% | $2.064B / 33.0% |
| Operating income / margin | $140M / 5.0% | $342M / 16.4% | $846M / 12.1% | $989M / 15.8% |
| Net earnings attributable to FIS common stockholders | $154M | $154M | $456M | $548M |
| Diluted EPS | $0.29 | $0.47 | $1.15 | $1.65 |
| Adjusted EBITDA | $1.192B | $808M | $2.714B | $2.270B |
Q3 revenue rose 35.4%, principally from Worldpay, while common-stockholder net earnings were unchanged and diluted EPS fell as weighted-average diluted shares increased to 524 million from 331 million. Operating income declined amid higher acquisition-related costs and acquired-intangible amortization. The quarter also included $87 million of asset impairment charges, primarily for software.
For the nine-month period, revenue grew 11.7%, while operating income fell 14.5% and common-stockholder net earnings fell 16.8%. Gross margin improved in both comparisons, which FIS attributed mainly to higher-margin Worldpay revenue, partly offset by acquired-intangible amortization.
Cash Flow, Debt and Liquidity
- Operating cash flow: $1.741B for the first nine months, versus $1.288B a year earlier. Cash additions to property and equipment and software were $544M, implying approximately $1.197B of operating cash flow after those expenditures; this is a simple calculation, not a company-defined measure.
- Investing and financing: Investing activities used $7.167B, including $6.629B net cash used for acquisitions. Financing activities provided $8.591B.
- Cash: The balance sheet reports $1.305B of cash and cash equivalents. The cash-flow statement reports $3.830B, which includes $2.000B of merchant float and $525M of other restricted cash; these amounts should not be treated as freely available corporate cash.
- Debt: Total debt was approximately $20.2B, including $3.169B of short-term borrowings. Long-term debt, excluding its current portion, was $16.945B. FIS reported a 2.4% weighted-average cost of debt, 6.3-year weighted-average maturity, and a mix of 77% fixed-rate and 23% floating-rate debt.
- Credit availability: The $5.5B revolving credit facility had $560M outstanding and $4.937B of borrowing capacity remaining, net of letters of credit. FIS said cash and operating cash flows were expected to cover operating needs, capital expenditures and mandatory debt service over the next 12 months.
- Shareholder returns: The quarterly dividend was $0.35 per share. Management suspended share repurchases following the Worldpay transaction; approximately $2.3B of authorization remained available.
Material Changes and Business Developments
- Worldpay acquisition: Completed July 31, 2019, for a stated total purchase price of $48.245B, including $38.635B in FIS shares, $3.423B cash consideration and $5.738B to pay off Worldpay debt not contractually assumed. FIS also repaid approximately $7.5B of Worldpay debt. The preliminary allocation included $38.428B of goodwill and $13.682B of intangible assets and remained subject to revision.
- Worldpay contributed $734M of revenue and a $162M pre-tax loss, including purchase-accounting effects, from acquisition through September 30. FIS issued approximately 289 million shares to Worldpay shareholders. The acquisition substantially increased reported goodwill, intangibles, debt and share count.
- FIS reorganized reporting into Merchant Solutions, Banking Solutions, Capital Market Solutions, and Corporate and Other. Q3 segment revenue and adjusted EBITDA were: Merchant $720M and $371M; Banking $1.491B and $641M; Capital Markets $611M and $280M; Corporate and Other adjusted EBITDA was negative $100M.
- FIS attributed the $222M year-over-year improvement in Q3 other income/expense to acquisition-related foreign-currency effects on non-hedged euro- and sterling-denominated notes. This is distinct from operating performance.
- FIS reported $293M of acquisition, integration and other costs for the first nine months, including $213M in Q3. Adjusted EBITDA excludes certain acquisition accounting adjustments and acquisition, integration and other costs; it is a non-GAAP performance measure.
Outlook, Risks and Contingencies
- FIS anticipated approximately $78M of adverse 2019 revenue impact from foreign-currency translation; actual effects were uncertain. The filing does not provide a clear consolidated earnings guidance figure.
- Management described ongoing investments in modernization, innovation, cloud migration and security. It targeted moving approximately 65% of server compute to its cloud by year-end 2019 and approximately 80% by the end of 2021. It cited more than $100M of annualized savings from data-center consolidation through year-end 2018 and expected approximately $150M of additional annualized savings from planned closures by 2021.
- Key risks include realizing Worldpay synergies and integrating the business, potential customer or employee losses and unforeseen liabilities; cybersecurity incidents, service interruptions, fraud and payment-network compliance; competition and technology change; economic and currency volatility; and possible Brexit disruption, including a no-deal scenario. FIS also noted that industry consolidation could either create or reduce business.
- FIS disclosed a Reliance Trust class action alleging approximately $115M in damages; it did not consider a loss probable and recorded no liability. Brazilian tax claims had potential total exposure of approximately $64M; FIS likewise considered liability not probable and recorded none.
- Acquired Worldpay obligations included a $919M tax receivable agreement liability and a contingent value rights liability reported at $700M at quarter-end. The TRA requires payments generally equal to 85% of specified realized tax benefits, with timing and amounts dependent on future tax outcomes. Litigation with Fifth Third concerns whether the acquisition triggered provisions of that agreement.
- Worldpay’s controls over financial reporting were excluded from management’s assessment of disclosure controls under the SEC’s recently acquired business guidance. FIS said disclosure controls were effective and that it was continuing to review and integrate Worldpay controls.
Important Facts for Investors to Verify
- Separate Worldpay’s partial-quarter contribution from underlying organic growth; the reported comparison is not like-for-like.
- Track integration costs, synergy delivery, acquired-intangible amortization, and whether adjusted EBITDA improvements translate into operating income and cash flow.
- Review leverage, short-term commercial-paper balances, refinancing needs, interest-rate exposure and available revolver capacity after the acquisition.
- Distinguish unrestricted cash from settlement funds and restricted cash, and assess working-capital movements alongside reported operating cash flow.
- Monitor final Worldpay purchase-price allocation, contingent liabilities, the TRA dispute and the Visa-related contingent value rights obligation.
- Assess currency effects, especially the disclosed expected 2019 revenue headwind, and the potential impact of Brexit and cybersecurity or operational events.