FIS Q1 2017 Form 10-Q Summary
Business context and reporting period
Fidelity National Information Services, Inc. (FIS) provides financial technology, processing, outsourcing and related services. This unaudited filing covers the three months ended March 31, 2017, compared with the three months ended March 31, 2016. FIS reports three segments: Integrated Financial Solutions (IFS), Global Financial Solutions (GFS), and Corporate and Other.
Key financial results
| Metric | Q1 2017 | Q1 2016 |
|---|---|---|
| Processing and services revenue | $2.255 billion | $2.181 billion |
| Gross profit / gross margin | $673 million / 29.8% | $628 million / 28.8% |
| Operating income / operating margin | $260 million / 11.5% | $184 million / 8.4% |
| Net earnings attributable to FIS common stockholders | $138 million | $55 million |
| Diluted EPS | $0.41 | $0.17 |
| Cash provided by operating activities | $454 million | $385 million |
- Revenue rose 3.4%; operating income increased 41%, and diluted EPS more than doubled. The effective tax rate was 35%, versus 34%.
- Segment revenue and adjusted EBITDA: IFS was $1.128 billion and $442 million; GFS was $1.019 billion and $283 million; Corporate and Other was $108 million and negative $43 million. IFS and GFS adjusted EBITDA margins were 39.2% and 27.8%, respectively.
- Cash and cash equivalents were $705 million at March 31, 2017, versus $683 million at December 31, 2016. Total current assets were $3.409 billion and current liabilities were $3.138 billion.
- Debt was approximately $9.5 billion, including the current portion, net of debt issuance costs, compared with approximately $10.5 billion at year-end 2016. The revolving credit facility had $242 million drawn and $2.751 billion of remaining borrowing capacity. Interest expense was $93 million, unchanged year over year.
- Investing cash flow was positive $671 million, including $827 million in proceeds from the business sale. Financing cash flow was negative $1.114 billion, mainly reflecting $2.443 billion of repayments of borrowings, partly offset by $1.381 billion of borrowings. Capital expenditures excluding capital leases were approximately $155 million.
Material changes versus the prior comparable period
- Revenue increased by $74 million, led by banking and payment solutions in Brazil, EMEA and APAC, post-trade derivatives, digital and corporate solutions, and risk and compliance. Lower global trading license renewals and the PS&E divestiture partly offset growth.
- Gross and operating margins improved, which management attributed to higher termination fees, higher-margin item processing solutions, expense synergies and cost-management initiatives. SG&A declined to $413 million from $444 million.
- Operating cash flow rose $69 million, primarily from improved collections and payment timing.
- GFS revenue grew 2.9% and adjusted EBITDA grew 12.7%; IFS revenue grew 1.4% and adjusted EBITDA grew 4.2%. Corporate and Other adjusted EBITDA declined to negative $43 million from negative $38 million.
Outlook, commentary, risks and unusual items
- FIS expects to exit 2017 with a SunGard cost-synergy run rate above $300 million. Management said cash, operating cash flows and available borrowing capacity should be sufficient for operating needs, capital expenditures and mandatory debt service over the next 12 months. It expects to continue quarterly dividends, subject to board discretion and debt covenants.
- Management expected continued unfavorable foreign-currency effects in 2017. FIS reported $1 million of unfavorable revenue impact and $2 million of unfavorable net earnings impact from currency movements in Q1.
- The February 1 sale of the SunGard Public Sector and Education (PS&E) business generated $850 million in gross proceeds and an $85 million pretax gain. Net proceeds after taxes and transaction expenses were expected to be approximately $500 million; proceeds were used to reduce debt. The sale was not reported as discontinued operations.
- Other income includes the $85 million sale gain and an approximately $25 million pretax charge related to redeeming $700 million of 5.0% notes due 2022 and paying down 2018 term loans. These items materially affect the comparison of reported earnings.
- FIS recorded $80 million of acquisition, integration and severance costs in Q1 2017, compared with $79 million in Q1 2016. Q1 2017 cash flow also included a $150 million deferred-tax benefit adjustment.
- Risks highlighted include cybersecurity and service interruptions, technology and competitive change, bank-industry consolidation, international operations and currency fluctuations, regulation, and acquisition integration and synergy execution. The company reported no material change to the risk factors in its 2016 Form 10-K.
- Contingencies include Reliance Trust ERISA litigation, for which potential losses could not be estimated, and Brazilian tax claims with potential aggregate exposure of approximately $70 million; FIS said a liability for those claims was not probable or reasonably estimable and recorded none. A separate patent case was dismissed with prejudice on March 30, 2017. The balance sheet included $101 million of SunGard-related contingent liabilities, mostly for unclaimed property examinations and tax matters.
- FIS planned to adopt the new revenue-recognition standard on January 1, 2018 and was still assessing its effect. Management anticipated possible changes to gross-versus-net presentation and recognition timing for implementation services, license renewals and certain software rental fees; the impact had not yet been quantified.
Important facts for investors to verify
- How much of earnings growth reflects recurring operations versus the PS&E sale gain, the debt-extinguishment charge, termination fees and other nonrecurring effects.
- Whether the expected SunGard synergies are achieved, and how integration costs and segment margins progress.
- Debt repayment plans, upcoming maturities, revolver usage, and the availability and location of cash; approximately $474 million of cash was held by foreign entities and generally could be subject to U.S. tax upon repatriation.
- The eventual financial-statement effects of adopting the revenue-recognition standard and the resolution or development of disclosed legal and tax contingencies.