Business Context and Reporting Period
This Form 10-K covers the fiscal year ended December 31, 2005, for Fidelity National Information Services, Inc. (formerly Certegy Inc.). The filing documents a significant corporate transformation: on February 1, 2006, Certegy merged with Fidelity National Information Services, Inc. (Former FIS), a subsidiary of Fidelity National Financial, Inc. (FNF). For accounting purposes, this was treated as a reverse acquisition where Former FIS is the accounting acquirer. Consequently, future financial reporting will reflect Former FIS's historical results, while this report presents Certegy's historical data. The combined entity operates in two primary segments: Transaction Processing Services (TPS) and Lender Processing Services (LPS).
Key Financial Metrics (Year Ended Dec 31, 2005)
| Metric | 2005 | 2004 |
|---|---|---|
| Revenues | $1,117.1 million | $1,039.5 million |
| Operating Income | $185.0 million | $168.5 million |
| Net Income | $130.3 million | $103.6 million |
| Diluted EPS (Continuing Ops) | $1.66 | $1.53 |
| Operating Margin | 16.6% | 16.2% |
| Long-Term Debt | $227.9 million | $274.0 million |
| Cash and Cash Equivalents | $138.0 million | $41.8 million |
| Capital Expenditures | $63.6 million | $40.9 million |
Note: 2005 results include $11.2 million in merger and acquisition (M&A) costs and a $27.3 million after-tax gain from the sale of the merchant acquiring business (discontinued operations).
Material Changes vs. Prior Period
- Revenue Growth: Consolidated revenues increased 7.5% to $1.1 billion, driven by 10.4% growth in Card Services and 3.6% growth in Check Services. Favorable currency rates contributed $6.4 million to revenue.
- Profitability: Operating income rose 9.8% to $185.0 million. Check Services operating income grew significantly by 29.3% due to reduced check guarantee net losses and growth in cash access services.
- Discontinued Operations: The company sold its merchant acquiring business in 2005, resulting in a $27.3 million after-tax gain. This business is now reported as discontinued operations.
- Debt Structure: Certegy repaid its $200 million revolving credit facility in 2005. However, the merger with Former FIS introduced substantial leverage; Former FIS carried approximately $3.1 billion in debt immediately following the merger.
- Segment Restructuring: Effective February 1, 2006, the company reorganized into TPS and LPS segments, consolidating Certegy's Card and Check services into TPS.
Guidance, Outlook, and Risks
Outlook and Synergies: Management expects to achieve cost synergies in corporate overhead, technology, and facilities following the merger. The combined company aims to cross-sell products across a diversified customer base, including 35 of the top 50 global banks. Capital expenditures for 2006 are projected to be between $225 million and $275 million.
Key Risks:
- Integration Risk: Failure to successfully integrate Certegy and Former FIS operations could delay anticipated benefits.
- Concentrated Ownership: FNF owns approximately 50.7% of the combined company, controlling board elections and corporate actions, which may limit minority shareholder influence.
- High Leverage: The combined entity carries significant debt ($3.1 billion post-merger), increasing vulnerability to economic downturns and interest rate fluctuations.
- Regulatory and Legal: The company faces ongoing litigation regarding alleged Foreign Corrupt Practices Act (FCPA) violations in China and patent infringement suits. It is also subject to strict regulations regarding data privacy (Gramm-Leach-Bliley Act) and check risk management.
- Technology Upgrades: Significant investment ($40 million for mortgage, $55 million for core banking) is required to upgrade legacy software acquired from Former FIS.
Investor Verification Checklist
- Merger Accounting: Verify the reverse acquisition accounting treatment and the specific purchase price allocation of Certegy's assets and liabilities.
- Debt Covenants: Review the Former FIS credit facility terms, specifically the $60 million annual dividend limitation and leverage ratios.
- Discontinued Operations: Confirm the final tax implications and any remaining liabilities associated with the sold merchant acquiring business.
- Legal Contingencies: Monitor the status of the Grace & Digital Information Technology Co. lawsuit regarding FCPA and RICO allegations.
- Segment Performance: Track the performance of the new TPS and LPS segments in the first quarter of 2006 to assess integration progress.