Business Context and Reporting Period
Company: Fidelity National Information Services, Inc. (FIS)
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2008
Business Overview: FIS is a leading global provider of technology solutions, processing services, and information-based services to the financial services industry, serving over 14,000 customers in more than 90 countries. The company operates through four reporting segments: Financial Solutions, Payment Solutions, International, and Corporate and Other.
Significant Corporate Events:
- LPS Spin-off: On July 2, 2008, FIS spun off its Lender Processing Services (LPS) segment into a separate publicly traded company. LPS results are reported as discontinued operations.
- Segment Restructuring: Following the spin-off, FIS reorganized its reporting structure into four new segments, restating prior periods for comparability.
- Acquisitions: The 2008 results include the full-year impact of the eFunds Corporation acquisition (completed September 2007).
Key Financial Metrics
| Financial Metric (in millions) | 2008 | 2007 | 2006 |
|---|---|---|---|
| Total Revenues | $3,446.0 | $2,921.0 | $2,416.5 |
| Gross Profit | $809.1 | $655.2 | $544.3 |
| Gross Margin | 23.5% | 22.4% | 22.5% |
| Operating Income | $334.9 | $281.9 | $193.6 |
| Operating Margin | 9.7% | 9.7% | 8.0% |
| Net Earnings (Continuing Ops) | $117.4 | $250.7 | $15.6 |
| Net Earnings (Total) | $214.8 | $561.2 | $259.1 |
| Diluted EPS (Total) | $1.11 | $2.86 | $1.37 |
| Cash Flow from Operations | $596.4 | $463.5 | $494.7 |
| Total Debt | $2,514.5 | $4,275.4 | $3,009.5 |
| Cash and Equivalents | $220.9 | $355.3 | $211.8 |
Material Changes vs. Prior Period
- Revenue Growth: Revenues increased 18.0% to $3.446 billion, driven primarily by the full-year inclusion of eFunds ($396.3 million incremental revenue) and growth in the Brazilian card processing venture ($87.7 million).
- Profitability Decline: Net earnings from continuing operations dropped significantly to $117.4 million (from $250.7 million in 2007). This decrease is largely attributable to the absence of a one-time $172.9 million after-tax gain from the sale of Covansys stock in 2007.
- Debt Reduction: Total debt decreased by approximately $1.76 billion to $2.51 billion, primarily due to the retirement of $1.585 billion in Term Loan B debt associated with the LPS spin-off.
- Impairment Charges: The company recorded a $52.0 million pre-tax impairment charge related to the retail check guarantee business trademark in Q4 2008.
- Stock Repurchases: FIS repurchased 6.0 million shares of common stock for $236.2 million during 2008.
Guidance, Outlook, and Risks
Management Commentary:
- Economic Environment: Management acknowledges the severe financial crisis and recession, noting potential bank failures and reduced consumer spending. However, they believe exposure to bank failures is less than 0.5% of revenues.
- Capital Expenditures: Expected to spend approximately 5% to 7% of 2009 revenue on capital expenditures.
- Dividends: The company maintains a quarterly dividend of $0.05 per share.
Key Risks and Contingencies:
- Goodwill Impairment: With $4.194 billion in goodwill (55.8% of total assets), the company faces risk of impairment charges if the economic downturn persists, though no impairment was recorded in the 2008 annual test.
- LPS Spin-off Taxation: While an IRS ruling confirmed tax-free treatment, there is a risk that the transaction could be deemed taxable if the IRS disagrees with factual representations, potentially resulting in substantial tax liabilities.
- Customer Concentration & Consolidation: Consolidation in the banking industry could reduce the customer base or increase pricing pressure. No single customer represents more than 10% of revenue.
- Regulatory Compliance: The business is subject to complex regulations regarding privacy, consumer reporting, and money transmission. Non-compliance could result in fines or operational restrictions.
Investor Verification Checklist
- Discontinued Operations: Verify the separation of LPS results to ensure accurate comparison of continuing operations performance.
- One-Time Gains: Confirm the exclusion of the 2007 Covansys sale gain ($274.5 million pre-tax) when analyzing year-over-year earnings trends.
- Goodwill Valuation: Monitor future quarterly reports for potential goodwill impairment charges given the high asset base and economic conditions.
- Debt Covenants: Review compliance with the Credit Agreement covenants, specifically the leverage ratio and interest coverage ratio, given the high debt load.
- Impairment Details: Review the specific impact of the $52.0 million check trademark impairment on future revenue projections for the Payment Solutions segment.