FIS 2016 Q3 Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2016. Unaudited results are compared with the corresponding 2015 periods. Amounts are in U.S. dollars; financial statement amounts below are in millions unless otherwise noted. FIS completed its SunGard acquisition on November 30, 2015, so 2016 includes SunGard while the comparable 2015 periods generally do not.
Financial performance
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Revenue | $2,309 | $1,579 | $6,795 | $4,721 |
| Gross profit | $782 | $557 | $2,115 | $1,559 |
| Operating income | $398 | $338 | $865 | $840 |
| Net earnings attributable to FIS common stockholders | $185 | $175 | $361 | $526 |
| Diluted EPS attributable to FIS common stockholders | $0.56 | $0.62 | $1.10 | $1.85 |
| Adjusted EBITDA | $766 | $529 | $2,099 | $1,407 |
- Revenue rose 46% in Q3 and 44% for the first nine months, largely reflecting the SunGard acquisition. Management also cited growth in debit payments, EMV-related card production, output solutions, and risk and compliance demand. Unfavorable currency effects reduced revenue by $16 million in Q3 and $80 million year to date.
- Gross margin was 33.9% in Q3 versus 35.3%, and 31.1% for nine months versus 33.0%. Operating margin was 17.2% versus 21.4% in Q3 and 12.7% versus 17.8% year to date. FIS attributed margin pressure principally to acquired-intangible amortization, integration and severance costs; higher-margin SunGard revenue partly offset the impact.
- Q3 diluted EPS declined despite higher revenue and earnings, reflecting higher interest expense and a larger share count following the acquisition. Nine-month earnings also compare against 2015, which included a $139 million pretax gain on sale of gaming check-warranty assets and a $130 million net other-income benefit.
Cash flow, balance sheet and debt
- Operating cash flow was $1.342 billion for the first nine months, compared with $698 million in 2015. Investing cash outflow was $450 million; financing cash outflow was $891 million. Cash increased by $19 million to $701 million.
- Capital expenditures, excluding capital leases, were approximately $446 million, up from $306 million. Additions to computer software were $336 million and additions to property and equipment were $110 million.
- At September 30, cash and cash equivalents were $701 million; total assets were $26.134 billion; total liabilities were $16.378 billion; and equity was $9.756 billion. Cash included approximately $508 million held by foreign entities, generally subject to U.S. income tax upon repatriation. FIS noted that much of its U.S. cash reflects deposits in transit for daily settlement activity.
- Total debt, including current maturities and net of debt issuance costs, was approximately $10.8 billion. Current debt was $317 million. The amended revolving facility had $3.0 billion of commitments, with $21 million outstanding and $2.971 billion of remaining borrowing capacity, net of letters of credit.
- In August, FIS extended its revolving facility to 2021 and issued $2.5 billion of notes due 2021, 2026 and 2046, with coupons of 2.25%, 3.00% and 4.50%. Proceeds were used to reduce revolving and term-loan balances. Nine-month interest expense was $284 million, versus $109 million.
Segments and material changes
- Integrated Financial Solutions (IFS): Q3 revenue was $1.124 billion and adjusted EBITDA $457 million; year-to-date revenue was $3.407 billion and adjusted EBITDA $1.333 billion. Adjusted EBITDA margin was 40.7% in Q3 and 39.1% year to date, down 210 and 170 basis points, respectively, with mix and incentive compensation cited as factors.
- Global Financial Solutions (GFS): Q3 revenue was $1.068 billion and adjusted EBITDA $343 million; year-to-date revenue was $3.106 billion and adjusted EBITDA $880 million. Adjusted EBITDA margin increased to 32.1% in Q3 and 28.3% year to date, reflecting SunGard’s higher-margin revenue and expense synergies.
- Corporate and Other: Adjusted EBITDA losses were $34 million in Q3 and $114 million year to date. This segment includes acquisition and integration costs, acquired-intangible amortization, non-strategic businesses, and SunGard purchase-accounting adjustments.
- SunGard purchase accounting reduced reported revenue by $37 million in Q3 and $177 million year to date through fair-value adjustments to acquired deferred revenue. Acquired intangible amortization also materially increased costs. FIS recorded $6 million of additional amortization in 2016 related to revisions to provisional acquisition values.
- Year-to-date basic share count averaged 325 million versus 282 million. Dividends were $0.26 per share each quarter; no share repurchases were made in the first nine months of 2016, compared with $300 million in the 2015 period.
Outlook, risks and contingencies
- Management expects cash, operating cash flow and available borrowing capacity to fund operating needs, capital expenditures and mandatory debt service over the next 12 months, and expects to continue quarterly dividends, subject to Board discretion and debt covenants.
- FIS targeted annual SunGard synergy run-rate savings of $200 million by the end of 2017, while noting that severance and other one-time integration costs would continue. Management also expected global economic weakness to weigh on professional-services spending through the end of 2016. The filing provides no clear numeric earnings or revenue guidance.
- Risks highlighted include acquisition integration and realization of synergies; cybersecurity and data loss; technology and implementation risks; regulatory and privacy changes; currency and international exposure; competition and pricing; banking-industry consolidation; and declining check use. Mobile payments are described as both an opportunity and a competitive risk.
- FIS reported a $107 million liability for certain contingencies assumed with SunGard, including unclaimed-property and tax matters; $11 million remained provisional. Brazilian tax authorities had asserted potential claims totaling approximately $72 million; FIS had not recorded a liability, stating the loss was not considered probable or reasonably estimable. A Reliance Trust ERISA class action remained at an early stage, and potential loss could not be estimated.
- The Federal Circuit affirmed the finding that the patents asserted in the DataTreasury litigation were unpatentable; FIS said an adverse outcome was remote. Disclosure controls were deemed effective. Integration of SunGard into FIS’s internal-control framework was ongoing, with the assessment expected to conclude by year-end 2016.
Important facts for investors to verify
- How much of reported growth and adjusted EBITDA reflects SunGard, and how results compare on a consistent, acquisition-adjusted basis.
- The pace and costs of SunGard integration, progress toward the $200 million synergy target, and the eventual earnings impact of purchase-accounting amortization and deferred-revenue adjustments.
- Debt repayment, interest costs, refinancing maturities, covenant capacity, and the availability and practical use of foreign-held cash.
- Whether operating cash flow and margins remain resilient as professional-services demand, foreign exchange, payment trends, and check volumes change.
- Developments in the Brazilian tax claims, acquired SunGard contingencies, Reliance Trust litigation, cybersecurity exposure, and completion of SunGard internal-control integration.