FIS

Business Context and Reporting Period

Company: Fidelity National Information Services, Inc. (FIS)
Filing Type: Form 10-Q (Unaudited)
Period Ended: June 30, 2006

FIS is a leading provider of technology solutions and processing services to the financial services industry. The reporting period is significantly impacted by the February 1, 2006, reverse acquisition of Certegy Inc., which was accounted for as a purchase. Following the merger, FIS reorganized into two primary operating segments: Transaction Processing Services (TPS) and Lender Processing Services (LPS). Additionally, on June 25, 2006, FIS entered into a merger agreement with its former parent, Fidelity National Financial, Inc. (FNF), expected to close in late 2006.

Key Financial Metrics

Note: Six-month cash flow data is provided for operating activities. Debt figures represent the sum of current portion of long-term debt ($15.6M) and long-term debt ($2,863.7M) as of June 30, 2006.

Material Changes vs. Prior Period

• Revenue Growth: Revenues increased 44.2% in the three-month period and 41.4% in the six-month period compared to the prior year. This growth is primarily attributable to the inclusion of Certegy Inc. revenues following the February 1, 2006 merger.
• Margin Compression: Gross profit margins decreased from 36.0% to 29.6% (three months) and from 35.0% to 30.2% (six months). This decline is due to the inclusion of Certegy's lower-margin business lines and increased amortization expenses related to the acquisition.
• Operating Expenses: Selling, general, and administrative (SG&A) expenses increased significantly, driven by the Certegy merger and a $24.5 million stock-based compensation charge related to the vesting of performance-based options triggered by the merger.
• Interest Expense: Interest expense rose to $49.0 million (three months) and $92.3 million (six months) due to higher interest rates and the recapitalization debt incurred in March 2005.
• Balance Sheet Expansion: Total assets more than doubled from $4.2 billion (Dec 31, 2005) to $7.3 billion (June 30, 2006), reflecting the acquisition of Certegy's assets and the recording of $1.9 billion in new goodwill.

Guidance, Outlook, and Risks

• Merger with FNF: FIS expects to complete the merger with FNF in late Q3 or early Q4 2006. The transaction is structured to eliminate FNF's holding company structure, with FIS surviving as the public entity.
• Capital Expenditures: FIS expects to spend approximately $27 million in the remainder of 2006 on core banking software development and an incremental $10 million on its mortgage servicing platform.
• Dividends: The company pays a quarterly dividend of $0.05 per share. Post-merger loan covenants limit annual dividend payments to $60 million plus certain other amounts.
• Key Risks:
  • Integration Risk: Failure to achieve synergies or delays in integrating Certegy operations.
  • Leverage: High debt levels ($2.9 billion) limit funds available for acquisitions and investments.
  • Market Conditions: Sensitivity to real estate activity levels (affecting LPS segment) and banking industry consolidation (affecting TPS segment).
  • Legal Proceedings: Ongoing litigation involving Grace & Digital Information Technology Co., Ltd. alleging FCPA and RICO violations; management believes no material adverse impact is likely.

Investor Verification Checklist

• Merger Synergies: Verify the timeline and progress of cost synergies expected from the Certegy integration.
• Debt Covenants: Confirm compliance with leverage and interest coverage ratios under the $2.8 billion credit facility.
• Stock-Based Compensation: Review the impact of the $24.5 million one-time charge on future earnings projections.
• Related Party Transactions: Assess the sustainability of revenue streams from FNF/FNT (approx. $69.6 million in the first six months of 2006).
• Goodwill Impairment: Monitor the $3.7 billion goodwill balance for potential impairment risks given the high leverage and integration challenges.