FIS 2015 Form 10-K Summary
Business context and reporting period
Fidelity National Information Services, Inc. (FIS) provides financial technology, payment processing, banking software, capital markets, consulting and outsourcing services. This annual report covers the year ended December 31, 2015; fourth-quarter figures are also shown. FIS serves more than 20,000 institutions in over 130 countries.
FIS completed its acquisition of SunGard on November 30, 2015. SunGard’s results are included only from that date, so 2015 results are not directly comparable with prior years. FIS reported Integrated Financial Solutions (IFS), Global Financial Solutions (GFS), and Corporate and Other; SunGard was included in GFS.
Financial performance and liquidity
| Metric | 2015 | 2014 |
|---|---|---|
| Revenue | $6,595.2 million | $6,413.8 million |
| Gross profit / gross margin | $2,202.0 million / 33.4% | $2,085.5 million / 32.5% |
| Operating income / operating margin | $1,099.2 million / 16.7% | $1,270.6 million / 19.8% |
| Net earnings attributable to FIS | $631.5 million | $679.1 million |
| Diluted EPS attributable to FIS | $2.19 | $2.35 |
| Cash from operating activities | $1,136.9 million | $1,164.9 million |
Revenue increased 2.8% year over year. IFS revenue was $3,928.9 million, with operating margin of 34.2%; GFS revenue was $2,717.1 million, with operating margin of 16.5%. Annual results include $253.9 million of SunGard revenue and $11.7 million of pretax loss for the month after acquisition.
At December 31, 2015, cash and cash equivalents were $687.6 million and total debt was $11,513.1 million, versus $492.8 million and $5,067.7 million, respectively, a year earlier. Cash included settlement-related balances; approximately $438.6 million was held by foreign entities and would generally be subject to U.S. tax upon repatriation. The company had $1,742.4 million of available revolving-credit capacity. Management said cash, operating cash flow and borrowing programs were expected to meet operating and capital needs for the next 12 months.
Capital expenditures were approximately $415.3 million. FIS paid $304.7 million in dividends and repurchased $300.4 million of stock. The quarterly dividend rose to $0.26 per share from $0.24 in 2014.
Material changes versus the prior comparable period
- Operating income fell to $1,099.2 million from $1,270.6 million, and operating margin declined to 16.7% from 19.8%, despite higher revenue and gross margin.
- SG&A rose $287.9 million, primarily reflecting $171.3 million of acquisition transaction, severance and integration costs, $44.6 million of GFS restructuring costs, and acquired-company expenses.
- Interest expense increased to $199.1 million from $172.8 million, principally because of acquisition-related debt.
- Net earnings attributable to FIS declined to $631.5 million from $679.1 million. The 2015 effective tax rate rose to 36.5% from 31.8%, partly due to a $90.1 million write-off of goodwill without tax basis connected to the gaming check-warranty asset sale.
- Operating cash flow decreased $28.0 million, partly due to an $87.6 million tax payment related to that sale and lower net earnings. Investing cash outflow increased to $1,898.0 million, including $1,720.4 million for acquisitions, net of cash acquired.
- Reported Q4 revenue was $1,874.8 million versus $1,689.1 million in Q4 2014; net earnings attributable to FIS were $105.2 million versus $195.3 million. Q4 pretax earnings from continuing operations were $175.8 million versus $311.1 million.
Outlook, commentary, risks and unusual items
- Management targeted annual SunGard synergy run-rate savings of $200 million by the end of 2017, while cautioning that integration costs may initially exceed savings. FIS expected 2016 capital expenditures of approximately 6% of revenue.
- Management expected the global-economy slowdown’s impact on professional-services spending to continue through the first half of 2016, and anticipated further unfavorable foreign-currency impacts. It expected a moderate increase in currency-related operating-income headwinds.
- FIS reported a $139.4 million pretax gain from selling gaming-industry check-warranty assets. The sale proceeds were $237.5 million; the transaction remained in continuing operations.
- SunGard acquisition consideration was approximately $5.1 billion; FIS also repaid approximately $4.7 billion of SunGard debt. Debt financing included $4.5 billion of senior notes. Goodwill increased to $14.7 billion, and acquired intangible assets to $5.2 billion.
- Key risks include successful SunGard integration and realization of synergies, high leverage and variable-rate exposure, cybersecurity or service outages, regulatory change, client and banking-industry consolidation, foreign exchange and emerging-market volatility, and potential goodwill or intangible-asset impairment.
- One SunGard customer experienced about a week of disruption to a hosted fund-accounting platform in August 2015, causing delayed or alternative NAV publication; no data was lost, and no other SunGard customers were disrupted.
- The DataTreasury patent case remained on appeal, and FIS said a possible loss range could not be estimated. Potential Brazilian tax claims of approximately $63.9 million were not accrued because the company did not consider a liability probable or reasonably estimable. SunGard acquisition-related contingencies included a provisional liability of $149.4 million, subject to revision.
- Management and the auditor concluded internal control over financial reporting was effective, but SunGard—representing approximately 46% of year-end assets—was excluded from the assessment and audit because of the short time since acquisition. The financial-statement audit opinion was unqualified.
Important facts for investors to verify
- Whether integration progress supports the $200 million annual synergy target by end-2017, and what costs remain to achieve it.
- Debt maturity, refinancing and interest-rate exposure, including covenant headroom and the effect of acquisition financing on cash generation.
- Underlying earnings and margin trends excluding the gaming-asset-sale gain, acquisition costs, restructuring costs and other nonrecurring items.
- SunGard purchase-price allocation and provisional liabilities as measurement-period estimates are finalized; also monitor intangible amortization and impairment risk.
- Foreign-currency sensitivity, professional-services demand and any 2016 operating impact from macroeconomic conditions.
- Developments in the DataTreasury appeal, Brazilian claims, remaining labor claims and other acquired contingencies.
- Completion of SunGard controls integration, given its exclusion from the year-end internal-control assessment.