FIS Q2 2016 Form 10-Q Summary
Business context and period. Fidelity National Information Services, Inc. (FIS) provides financial technology, processing, software and consulting services. This unaudited report covers the quarter and six months ended June 30, 2016. Results include SunGard, acquired November 30, 2015, so comparisons with 2015 are not like-for-like; management also recast prior segment results to reflect its current reporting structure.
Financial performance
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Processing and services revenue | $2,305 million | $1,587 million | $4,486 million | $3,142 million |
| Gross profit / margin | $705 million / 30.6% | $517 million / 32.6% | $1,333 million / 29.7% | $1,002 million / 31.9% |
| Operating income / margin | $283 million / 12.3% | $287 million / 18.1% | $467 million / 10.4% | $502 million / 16.0% |
| Net earnings attributable to FIS common stockholders | $121 million | $240 million | $176 million | $351 million |
| Diluted EPS from continuing operations | $0.36 | $0.85 | $0.53 | $1.25 |
| Adjusted EBITDA | $696 million | $453 million | $1,333 million | $878 million |
- Revenue rose approximately 45% in Q2 and 43% for the first half, principally due to SunGard, with additional contributions from trading and capital-markets solutions, debit payments and card production, and digital solutions. Revenue included SunGard purchase-accounting reductions of $59 million in Q2 and $140 million for the first half.
- Profitability declined despite higher revenue. FIS cited acquired-intangible amortization, integration and severance expense, and revenue mix. Interest expense increased $57 million in Q2 and $113 million in the first half year over year, largely because of debt used to finance SunGard.
- Prior-year results included a $140 million pretax gain on the sale of the gaming check-warranty assets in Q2 2015, contributing to the sharp earnings comparison. The sale also included a $90.1 million write-off of goodwill with no tax basis, affecting the prior-year tax rate.
- Segment results: Q2 IFS revenue was $1,162 million and adjusted EBITDA $450 million; GFS revenue was $1,048 million and adjusted EBITDA $287 million. For the first half, IFS revenue and adjusted EBITDA were $2,283 million and $876 million; GFS was $2,038 million and $538 million. Corporate and Other adjusted EBITDA was $(41) million in Q2 and $(81) million for the first half.
Cash flow, balance sheet and liquidity
- First-half operating cash flow was $820 million, versus $443 million in 2015. Investing cash use was $296 million, including $293 million of capital expenditures excluding capital leases. Financing cash use was $461 million; cash increased $83 million to $765 million.
- At June 30, cash was $765 million and debt was approximately $11.1 billion, compared with $682 million and approximately $11.4 billion at December 31, 2015. Current debt was $913 million. The revolving facility had $1,367 million of remaining capacity, net of letters of credit.
- Current assets were $3,678 million and current liabilities $3,496 million. Approximately $502 million of cash was held by foreign entities and would generally be subject to U.S. income tax upon repatriation; most U.S. cash balances reflected settlement-related deposits in transit.
- Management said cash and expected operating cash flows should cover operating needs, capital expenditures and mandatory debt service for the next 12 months. FIS expected capital expenditures to be approximately 6% of 2016 revenue and expected to continue quarterly dividends; the Q2 dividend was $0.26 per share.
Outlook, commentary, risks and contingencies
- Management expected the global economic slowdown’s impact on client professional-services spending to continue through the second half of 2016. It anticipated minimal net foreign-currency impact on operating income for 2016.
- FIS targeted annual SunGard cost-synergy run-rate savings of $200 million by the end of 2017, while noting that one-time severance and other integration costs would continue. Purchase-accounting amortization and deferred-revenue adjustments were also expected to continue.
- Management cited opportunities in outsourcing, digital banking, mobile payments, EMV cards, regulatory solutions and international markets. Risks include competition and uncertain mobile-payment adoption, declining check use, bank consolidation, security incidents, integration execution, currency movements and regulatory changes.
- The filing added Brexit as a risk: potential economic, currency, client, supplier, employee, trade and regulatory disruption could adversely affect results and cash flows.
- Contingencies include a DataTreasury patent case, for which possible loss could not be estimated; $112 million of provisional liabilities assumed with SunGard, including $75 million of unrecognized tax benefits; and Brazilian tax claims with total potential exposure of about $80 million, for which FIS recorded no liability because it did not consider loss probable or reasonably estimable.
- Disclosure controls were assessed as effective. FIS continued integrating SunGard into its internal-control framework, with the related assessment expected to be completed by year-end 2016.
Important facts for investors to verify
- How much of reported growth reflects SunGard versus organic growth, and how the acquired deferred-revenue adjustment affects future comparisons.
- Progress toward the $200 million synergy target, and the remaining integration, severance and acquired-intangible amortization burden.
- Whether operating margins and earnings recover as integration proceeds, given lower reported margins and higher interest expense.
- Debt maturities, revolving-facility usage, foreign-held cash accessibility and sensitivity to interest rates; management estimated a 100-basis-point LIBOR increase would add $20 million to annual debt service after swaps.
- Developments in the disclosed litigation, acquired contingencies and Brexit-related business and currency risks.