Fidelity National Information Services, Inc. — 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018. This is an annual filing; fourth-quarter figures are included where relevant. FIS provides financial technology, processing, software and outsourcing services to banking, payments, capital-markets, wealth and retirement clients in more than 130 countries.
Financial performance
| Metric | 2018 | 2017 | Change |
|---|---|---|---|
| Revenue | $8.423 billion | $8.668 billion | Down 2.8% |
| Gross profit / margin | $2.854 billion / 33.9% | $2.874 billion / 33.2% | Profit down slightly; margin up |
| Operating income / margin | $1.458 billion / 17.3% | $1.432 billion / 16.5% | Income up 1.8% |
| Net earnings attributable to FIS common stockholders | $846 million | $1.261 billion | Down 32.9% |
| Diluted EPS | $2.55 | $3.75 | Down 32.0% |
| Cash from operations | $1.993 billion | $1.741 billion | Up $252 million |
| Capital expenditures, excluding capital leases and other financing | $622 million | $613 million | Up $9 million |
Management attributed the revenue decline primarily to prior-year divestitures and the 2018 sale of Certegy Check Services, partly offset by growth in banking, wealth, payments, digital and corporate solutions. Gross margin benefited from software-license mix and expense synergies. Operating margin improved despite a $95 million impairment charge related to the Brazilian Venture transaction. Operating cash flow improved mainly because of lower receivables following stronger collections; approximate operating cash flow less stated capital expenditures was $1.37 billion.
Consolidated segment revenue was $4.401 billion for IFS, $3.718 billion for GFS and $304 million for Corporate and Other. IFS revenue rose 3.3% and adjusted EBITDA rose 4.7% to $1.962 billion; GFS revenue fell 8.2%, mainly reflecting divestitures and currency, while adjusted EBITDA increased 5.1% to $1.391 billion. Adjusted EBITDA is a non-GAAP segment measure; consolidated adjusted EBITDA was $3.133 billion versus $2.984 billion in 2017.
For the fourth quarter, revenue was $2.167 billion versus $2.166 billion a year earlier; net earnings attributable to FIS common stockholders were $299 million versus $934 million, and diluted EPS was $0.91 versus $2.77. The comparison is heavily affected by the large 2017 tax benefit.
Balance sheet, debt and liquidity
- At year-end, cash and cash equivalents were $703 million, total debt was $8.985 billion, and total equity was $10.222 billion. Debt increased from $8.763 billion in 2017.
- FIS reported $3.733 billion of current assets and $3.125 billion of current liabilities. These include substantial settlement balances tied to payment operations; cash balances also include settlement-related deposits in transit.
- The $4 billion revolving credit facility had $3.786 billion of borrowing capacity available at year-end, net of letters of credit. Commercial paper outstanding was $250 million. Management said cash and anticipated operating cash flows were sufficient for expected operating needs, capital spending and mandatory debt service over the next 12 months.
- Debt was 89% fixed-rate and 11% floating-rate; weighted-average debt cost was 3.3% and weighted-average maturity was 7.5 years. A 100-basis-point increase in floating rates was estimated to add $10 million to annual interest expense.
- 2018 dividends declared were $1.28 per share; the company expected to continue quarterly dividends, subject to board discretion. Approximately $2.7 billion remained under the share-repurchase authorization at year-end. FIS repurchased about $1.215 billion of shares in 2018.
Material changes and unusual items
- The Brazilian Venture with Banco Bradesco was unwound on December 31, 2018. FIS transferred the Bradesco card-processing business to the bank, while retaining certain assets serving other clients and entering into a long-term services agreement with Bradesco. The transaction is expected to reduce annual reported revenue by approximately $225 million; management expected retained-client earnings and contracted services to largely replace lost net earnings, but gave no assurance.
- The Brazilian transaction generated $95 million of impairment charges and a further $12 million pre-tax disposal loss. These remained in continuing operations.
- FIS sold substantially all Certegy Check Services North American assets in August 2018, recording a $54 million pre-tax loss. Earlier divestitures of Capco-related consulting businesses and Public Sector and Education continued to affect year-on-year comparability.
- Net earnings fell sharply against 2017, which included a $761 million net tax-reform benefit. The 2018 effective tax rate was 18.8%, compared with negative 32.9% in 2017; 2018 also included a $33 million tax detriment related to dispositions.
- FIS adopted revenue-recognition Topic 606 retrospectively. The filing says adoption reduced 2017 revenue by approximately $455 million and net earnings by $58 million, and reduced 2016 revenue by approximately $410 million and net earnings by $43 million. The filing does not quantify 2018 results on the former accounting basis.
Outlook, management commentary and risks
- Management expected 2019 foreign-currency translation to reduce revenue by approximately $45 million, subject to exchange-rate uncertainty. It expected 2019 capital expenditures of approximately 7.5% of revenue.
- FIS had moved about 50% of server compute to its private cloud and targeted 65% by year-end 2019 and 80% by year-end 2021. Data-center consolidation had generated more than $100 million of annualized expense reductions by year-end 2018; approximately 20 further closures by 2021 were expected to yield about $150 million of additional annualized savings.
- Management highlighted recurring, multi-year service contracts as a source of revenue stability, while noting transaction volumes, software licenses and professional services can fluctuate. Digital payments and banking are both growth opportunities and competitive risks.
- Principal risks include cybersecurity incidents or service interruptions; intense competition and technology shifts; bank consolidation, contract renewal and pricing pressure; regulatory and privacy compliance, including GDPR and upcoming California and Brazil laws; foreign-exchange and emerging-market exposure; and execution of the Brazil transition.
- Goodwill was $13.545 billion, about 57% of total assets. The 2018 impairment assessment found no goodwill impairment, but adverse business or economic changes could require future write-downs. Other material contingencies include a Reliance Trust class action alleging approximately $125 million in damages and Brazilian tax claims with potential exposure of approximately $64 million; FIS said losses were not probable and recorded no liability for those claims.
- The company expected adoption of lease accounting in 2019 to add approximately $400–$500 million of operating-lease right-of-use assets and liabilities, with an immaterial effect on operating results. The filing reports unqualified audit opinions and effective internal control over financial reporting.
Important facts for investors to verify
- How the $225 million annualized revenue reduction from the Brazilian Venture unwind compares with retained-customer revenue, contracted Bradesco services and expected earnings replacement.
- Underlying organic and constant-currency revenue growth, separating divestitures, currency effects and Topic 606 presentation changes from continuing business trends.
- Whether improving adjusted EBITDA and operating margins translate into sustained GAAP earnings and cash generation, given the large 2017 tax benefit and 2018 divestiture and impairment items.
- Debt maturities, refinancing costs, variable-rate exposure and continued access to commercial-paper and revolving-credit funding.
- Progress against cloud migration, data-center savings, capital-spending and foreign-exchange expectations, and any changes to goodwill impairment assumptions or disclosed legal and tax contingencies.