Fidelity National Information Services, Inc. — Q1 2013 Form 10-Q
Business context and reporting period. FIS provides banking and payments technology, processing, software and related services to financial institutions and other clients. This unaudited report covers the three months ended March 31, 2013, compared with Q1 2012; balance-sheet figures are compared with December 31, 2012. FIS reports Financial Solutions Group (FSG), Payment Solutions Group (PSG), International Solutions Group (ISG), and Corporate and Other. Management says recurring services have historically represented about 80% of revenue.
Financial performance and liquidity
| Metric | Q1 2013 | Q1 2012 / prior date |
|---|---|---|
| Processing and services revenue | $1,478.0 million | $1,413.4 million; +4.6% |
| Gross profit / gross margin | $470.0 million / 31.8% | $423.9 million / 30.0% |
| Operating income / operating margin | $275.1 million / 18.6% | $222.5 million / 15.7% |
| Continuing earnings attributable to FIS | $148.0 million | $91.5 million |
| Net earnings attributable to FIS | $144.1 million | $87.1 million |
| Diluted EPS attributable to FIS | $0.49 | $0.29 |
| Operating cash flow | $207.5 million | $203.8 million |
| Cash and cash equivalents | $590.6 million | $517.6 million at Dec. 31, 2012 |
| Total debt, including current portion | $4,603.0 million | $4,385.5 million at Dec. 31, 2012 |
| Current assets / current liabilities | $1,923.1 million / $1,278.4 million | $1,844.2 million / $1,256.8 million at Dec. 31, 2012 |
Revenue growth reflected transaction and processing growth, consulting and professional services demand, and higher termination fees; lower retail check activity and $15.4 million of unfavorable currency effects partly offset growth. Cost management and operating leverage improved reported gross and operating margins. Interest expense fell $7.7 million year over year, primarily due to lower borrowing costs and reduced debt. Q1 2013 included a $9.2 million pretax gain associated with acquiring mFoundry’s remaining interest. The prior-year quarter included $12.7 million of debt-refinancing costs and a $5.7 million write-off of previously capitalized debt costs.
Net cash provided by operating activities was $207.5 million. Investing used $195.7 million, including $115.0 million for the mFoundry acquisition and $73.7 million of property and software additions. Financing provided $68.2 million, including $216.2 million of net borrowings, partly offset by $105.3 million of treasury-stock activity and $64.8 million of dividends. Cash increased $73.0 million during the quarter. About $391.5 million of cash was held by foreign entities; management noted that much domestic cash is unavailable for general corporate purposes because of settlement timing.
At March 31, 2013, current assets exceeded current liabilities by $644.7 million. Management said cash plus expected operating cash flows should be sufficient for operating needs and debt service over the next 12 months. Debt was $4.603 billion; reported cash implies net debt of about $4.012 billion, although cash availability is subject to the limitations noted above.
Material changes and segment results
- FSG revenue rose to $575.3 million from $538.9 million; operating income increased to $188.4 million from $166.8 million. Growth included professional services, global commercial services and termination fees.
- PSG revenue increased to $611.8 million from $597.1 million; operating income rose to $238.5 million from $216.2 million. Output and network solutions grew, partly offset by lower retail checks and customer losses.
- ISG revenue increased to $291.6 million from $276.8 million, despite $15.1 million of unfavorable currency impact; operating income was $40.3 million versus $33.0 million. Management cited transaction growth in Brazil, European processing and consulting, and expansion in Asia.
- Discontinued operations generated a $3.9 million net loss versus a $4.4 million loss. The Healthcare Business had been sold in August 2012; the remaining discontinued-operation loss primarily reflects Brazilian item-processing and remittance shutdown claims.
- Goodwill was $8.487 billion at March 31, up from $8.382 billion at year-end, primarily reflecting acquisitions. Treasury-stock purchases were $100.4 million for 2.7 million shares; $549.3 million remained under the repurchase authorization.
Outlook, management commentary, risks and unusual items
- Outlook: The filing provides no formal revenue or earnings guidance. FIS expected 2013 capital expenditures of approximately 5%–6% of revenue and expected to continue quarterly dividends. The board had raised the quarterly dividend to $0.22 per share, paid March 29, 2013.
- Financing after quarter-end: On April 15, FIS issued $250 million of 2.0% notes due 2018 and $1.0 billion of 3.5% notes due 2023, generating net proceeds of $1,233.1 million. The company planned to redeem its $750 million 7.625% notes due 2017; the redemption date was May 15, with an expected approximately $50 million premium. On April 23, the credit agreement was amended, increasing revolving capacity to $2.0 billion and providing total committed capital of $4.0 billion. These were subsequent events, not March 31 balances.
- Interest-rate exposure: A 100-basis-point LIBOR increase was estimated to add $9.5 million to annual debt service after swaps, based on March 31 debt balances. Interest-rate swaps had $2.1 billion aggregate notional value.
- Business and operating risks: Management cited competitive pricing, customer consolidation and loss, declining check activity, economic and regulatory changes, technology adaptation, and cyberattacks. It expects ongoing investment in information security. The 2011 cyber-incident caused approximately $13 million of unauthorized ATM transaction losses; a later investigation found some client data may have been accessed, and FIS said it did not expect the additional information to have a material adverse effect, while noting that further discoveries or regulatory/client actions could have material consequences.
- Contingencies: Approximately 1,500 active Brazilian labor claims remained at March 31. The accrued liability for active and unasserted claims considered probable, net of court-ordered deposits, was $38.5 million. A patent-infringement case with Fiserv subsidiaries remained unresolved; trial was scheduled for January 2014, and FIS could not estimate a possible loss or range.
- Unusual items: mFoundry’s remaining interest was acquired in March for $115.0 million net of cash acquired. Related-party revenue was $75.1 million, primarily from the Banco Bradesco Brazilian venture, compared with $106.1 million in the prior-year quarter.
Important facts for investors to verify
- Whether Q1 margin and earnings improvement persists after considering termination fees, the mFoundry gain, and the prior-year executive compensation and refinancing charges.
- How the April refinancing and planned 2017-note redemption affect interest expense, debt maturities, fees and cash availability.
- Whether operating cash conversion and working-capital trends support dividends, repurchases, acquisitions and debt service.
- Developments in Brazilian labor claims and the Fiserv patent litigation, including any change in estimated exposure.
- Cybersecurity and regulatory developments related to the 2011 incident, and the costs and effectiveness of continuing security investments.
- Currency movements, international transaction growth, customer losses and the continuing impact of declining retail check activity.