Fidelity National Information Services, Inc. — Q3 2015 Form 10-Q
Reporting period: Three and nine months ended September 30, 2015. Unless otherwise stated, amounts are in millions of U.S. dollars. FIS provides banking and payments technology, processing, consulting and outsourcing services, with significant recurring revenue from multiyear contracts. In March 2015, it reorganized reporting into Integrated Financial Solutions (IFS), Global Financial Solutions (GFS), and Corporate and Other; prior-period segment figures were recast.
Financial performance
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Revenue | $1,578.8 | $1,605.3 | $4,720.4 | $4,724.7 |
| Gross profit / margin | $557.5 / 35.3% | $530.8 / 33.1% | $1,559.8 / 33.0% | $1,513.3 / 32.0% |
| Operating income / margin | $338.3 / 21.4% | $323.7 / 20.2% | $840.4 / 17.8% | $919.5 / 19.5% |
| Net earnings attributable to FIS | $175.2 | $150.5 | $526.3 | $483.8 |
| Diluted EPS attributable to FIS | $0.62 | $0.52 | $1.85 | $1.67 |
| Operating cash flow | Not presented separately | Not presented separately | $697.5 | $687.1 |
- Q3 revenue fell 1.7% year over year; nine-month revenue was nearly flat. Reported revenue included unfavorable foreign-exchange effects of approximately $71.2 in Q3 and $180.0 for the nine months, primarily from the stronger U.S. dollar against the Brazilian real. Excluding currency effects, management attributed growth to acquisitions, EMV card production, digital solutions, core banking, payments and transaction volumes.
- Nine-month operating income declined despite higher gross profit, reflecting lower termination fees, acquisition and integration costs, and $44.6 of first-quarter GFS restructuring costs. Q3 operating income and margin improved, which management attributed partly to restructuring and expense management.
- Nine-month continuing-operations earnings attributable to FIS were $533.3, versus $488.1; diluted continuing-operations EPS was $1.87 versus $1.69. The effective tax rate rose to 36% from 31%, partly due to a $90.1 write-off of goodwill with no tax basis related to the gaming check-warranty asset sale.
Balance sheet, cash flow and capital
- At September 30, cash and cash equivalents were $441.5 (down from $492.8 at year-end 2014); total debt was $4,970.4, including $13.4 current. FIS reported $4,957.0 of long-term debt excluding the current portion. The $3.0 billion revolving facility had $705.0 outstanding and $2,294.2 of remaining capacity, net of letters of credit.
- Total assets were $14,187.8 and total equity was $6,604.2. Approximately $260.2 of cash was held by foreign entities and generally would be subject to U.S. income tax if repatriated; much domestic cash reflected settlement activity.
- Nine-month operating cash flow was $697.5. Investing cash use was $82.3, including $305.7 of capital expenditures excluding capital leases and $240.7 of proceeds from asset sales. Financing cash use was $611.3, including $300.4 of treasury-stock purchases and $219.5 of dividends. Cash declined $51.3 after foreign-exchange effects.
- FIS paid quarterly dividends of $0.26 per share in Q3. It repurchased $300.4 of shares during the first nine months, with approximately $1,224.1 remaining under its authorization at September 30.
Material changes and unusual items
- In Q2, FIS sold assets associated with its gaming-industry check-warranty business for proceeds of $237.5 and recorded a $139.4 pretax gain in continuing operations. The sale also drove the $90.1 goodwill write-off noted above; it was not reported as discontinued operations.
- Nine-month SG&A rose to $719.4 from $593.8, including $59.2 of acquisition transaction and integration costs and $44.6 of GFS severance. Q3 included $35.6 of acquisition-related transaction and integration costs.
- FIS announced an agreement on August 12 to acquire SunGard for approximately $2.3 billion cash and 44.7 million FIS shares, and to assume, repay or refinance approximately $4.7 billion of SunGard debt. FIS expected to close in Q4 2015, subject to customary conditions including SunGard shareholder approval.
- After quarter-end, FIS issued $4.5 billion of senior notes on October 20 to help fund the acquisition. The notes include a special mandatory redemption provision for the 2018, 2020 and 2022 series if the deal does not close by June 30, 2016; the 2025 notes are not subject to that provision. Bridge commitments were terminated following these financing arrangements. FIS also reported a $15.9 cash settlement of treasury-lock hedges in October, to be amortized to interest expense over ten years.
Outlook, risks and contingencies
- Management said global economic softness was affecting client spending, particularly professional services. It expected unfavorable foreign-currency effects to continue for the remainder of 2015, but could not reasonably estimate their magnitude. It expected capital spending to slightly exceed its 5%–6% of revenue goal for 2015, and stated cash, operating cash flow and available borrowing capacity were expected to fund operating needs, capital expenditures and mandatory debt service over the next 12 months.
- Management cited continued opportunity in outsourced integrated solutions, digital banking, mobile payments and EMV migration, while noting competitive uncertainty in mobile payments, declining check use and banking-industry consolidation. It also described cyberattacks and information security as growing operational threats and areas of investment.
- Acquisition risks include failure or delay to close, integration costs and execution, employee or customer attrition, realization of synergies, additional indebtedness and potential dilution. FIS disclosed that SunGard’s hosted fund-accounting platform disrupted one customer’s U.S. operations for about a week in August after an operating-system update; no data was lost, but possible consequences were still under evaluation.
- FIS disclosed approximately 580 active labor claims related to a former Brazilian operation; its accrued liability was $10.3 net of court-ordered deposits. It also described 35 Brazilian tax claims with potential exposure of approximately $76.8, for which it recorded no liability because loss was not considered probable or reasonably estimable. Patent litigation remained subject to appeals, and FIS said a possible loss or range could not be estimated.
- FIS reported no off-balance-sheet arrangements, no material change in contractual obligations other than disclosed financing and acquisition matters, and effective disclosure controls as of quarter-end.
Important facts for investors to verify
- Whether the SunGard acquisition closed as expected, the final financing and debt burden, and actual integration costs, synergies and share dilution.
- Underlying revenue and margin trends excluding currency effects, acquisitions, termination-fee changes and the gaming-asset gain.
- Cash conversion, capital spending, dividend and repurchase levels, and available revolving-credit capacity as acquisition financing takes effect.
- Developments and potential financial impact of the Brazilian claims, patent litigation, and the SunGard platform incident.
- Actual foreign-exchange effects and the extent to which professional-services softness, payment-market competition and banking consolidation affect results.