Fidelity National Information Services, Inc. — 2011 Form 10-K
Reporting period: Fiscal year ended December 31, 2011; the filing also reports fourth-quarter results. Amounts are in U.S. dollars unless stated otherwise.
Business context
FIS provides banking, payments and financial technology software, processing and outsourcing services to more than 14,000 institutions in over 100 countries. Its four reporting segments are Financial Solutions Group (FSG), Payment Solutions Group (PSG), International Solutions Group (ISG), and Corporate and Other. Recurring services—historically more than 80% of revenue—are largely delivered under multiyear contracts, though transaction-related fees fluctuate with activity. The 2011 results include Capco, acquired in December 2010; there were no significant acquisitions in 2011.
Key financial results
| Metric | 2011 | 2010 |
|---|---|---|
| Revenue | $5,745.7 million | $5,269.5 million |
| Gross profit / gross margin | $1,747.7 million / 30.4% | $1,631.8 million / 31.0% |
| Operating income / operating margin | $1,066.8 million / 18.6% | $801.1 million / 15.2% |
| Continuing-operations earnings attributable to FIS common stockholders | $493.8 million | $447.6 million |
| Net earnings attributable to FIS | $469.6 million | $404.5 million |
| Diluted EPS, continuing operations / total | $1.61 / $1.53 | $1.27 / $1.15 |
| Cash from operations | $1,171.5 million | $1,071.3 million |
| Capital expenditures | $300.3 million | $314.0 million |
Revenue rose 9.0%. Operating margin improved, while gross margin declined 60 basis points. Operating cash flow less capital expenditures was approximately $871 million, calculated from the reported figures.
Fourth-quarter 2011 revenue was $1,494.4 million versus $1,396.3 million in fourth-quarter 2010; net earnings attributable to FIS common stockholders were $117.0 million versus $110.6 million, and diluted EPS was $0.39 versus $0.36.
Segments and changes versus 2010
- FSG: Revenue of $2,076.8 million, up 9.8%; operating income of $680.3 million. Margin declined to 32.8% from 35.6%, principally reflecting a greater mix of lower-margin Capco and other professional services.
- PSG: Revenue of $2,492.2 million, approximately flat; operating income of $853.5 million and margin of 34.2%. Growth in electronic payments and print/mail was offset by weaker item processing and retail check activity. A change to net presentation of certain merchant interchange fees reduced reported revenue by $34.4 million.
- ISG: Revenue of $1,177.6 million, up 28.4%; operating income of $187.6 million and margin of 15.9%, versus 7.8% in 2010. Growth included Brazil, Capco’s European business and favorable foreign exchange; the prior year included substantial Brazilian Venture impairment charges.
Consolidated revenue growth reflected $304.7 million of incremental revenue from 2010 acquisitions, increased professional services and processing activity, and $47.4 million of favorable foreign-currency impact. The 2010 comparison included an $83.3 million Banco Santander termination fee, which did not recur in 2011. Higher interest expense and other items partly offset operating-income growth; total other expense increased to $322.5 million from $184.8 million.
Financial position, liquidity and capital allocation
- At year-end, cash and cash equivalents were $415.5 million, including $246.3 million held by foreign entities. Total debt, including current maturities, was $4,809.8 million, down from $5,192.1 million. The current portion was $259.2 million; total equity was $6,651.2 million.
- FIS reported $824.0 million of available revolving borrowing capacity at December 31, 2011, net of outstanding letters of credit. Management stated operating cash flows were expected to fund operating needs and debt service over the next 12 months.
- Scheduled debt principal payments were $248.4 million in 2012, $373.0 million in 2013 and $1,504.7 million in 2014. The company also had $1.25 billion of senior notes due in 2017 and 2020, bearing 7.625% and 7.875% interest, respectively.
- FIS paid $60.4 million in dividends in 2011. It announced a planned increase from $0.05 to $0.20 per share quarterly beginning in 2012, subject to board discretion and debt restrictions. Share repurchases totaled $399.2 million in 2011.
- Management expected 2012 capital expenditures of approximately 5%–6% of revenue, including increased information-security spending.
Outlook, risks and unusual items
No specific revenue or earnings guidance was provided. Management expressed caution about the broader economic recovery but expected continued bank technology investment, growth in electronic payments and benefits from outsourcing trends. Banking-sector consolidation may either expand FIS’s business or lead to lost customers, reduced services or pricing pressure. Management also identified declining check usage as a headwind to check-related businesses.
- Cybersecurity: Unauthorized activity on the Sunrise prepaid platform caused an approximately $13.0 million loss in early 2011. About 7,200 accounts may have been at risk and three cardholders’ non-public information may have been disclosed; no financial institution or its customers incurred a loss. FIS increased security resources and expected to nearly double information-security spending in 2012.
- Regulation: Dodd-Frank and the Durbin Amendment introduced debit interchange limits and network/routing requirements. Interchange fees are primarily pass-through for FIS, but indirect effects on customers, processing volumes and investment needs remain uncertain.
- Brazilian Venture: Banco Bradesco-related venture revenue was approximately $298.9 million in 2011. The partner may terminate the agreement; contractual payments mitigate but do not eliminate the exposure. FIS also disclosed potential labor-claim exposure if the venture ends.
- Discontinued Brazilian operations: 2011 discontinued-operations losses were $24.2 million, including $34.6 million of charges to settle or increase reserves for potential labor claims. The recorded labor-claims liability was $31.4 million at year-end.
- Other unusual items: 2011 included a $9.1 million Capco North America trademark impairment, a $34.0 million impairment of available-for-sale securities, and debt refinancing and issuance-cost charges. Goodwill was $8,542.8 million, or 61.7% of total assets; management reported no goodwill impairment, but noted the sensitivity of impairment assessments to economic and business conditions.
- Legal and other contingencies: The filing discusses an ongoing Fair Credit Reporting Act case and a patent-infringement suit filed in January 2012; loss estimates were not available. Tax audits, customer indemnifications, foreign-exchange exposure and related-party arrangements are also disclosed risks.
The independent auditor issued unqualified opinions on the financial statements and internal control over financial reporting; management also concluded disclosure controls were effective.
Important facts for investors to verify
- Whether recurring processing volumes, client renewals and pricing offset check-related declines, interchange changes and bank consolidation.
- Whether the projected 2012 dividend increase and planned capital expenditures remain compatible with debt covenants, debt service and cash availability.
- Debt repayment and refinancing capacity, particularly the large scheduled 2014 maturity, variable-rate exposure and interest-rate hedges.
- Progress and costs of the expanded cybersecurity program, and whether further losses, customer claims or regulatory actions arise from the Sunrise incident.
- Brazilian Venture contract stability, related-party revenue concentration and the ultimate amount of Brazilian labor claims.
- Capco’s margin contribution, contingent consideration and incentive obligations, as well as the carrying value of goodwill and other acquired intangibles.
- Developments in the disclosed litigation and tax contingencies; the filing does not provide a clear estimate of potential losses for the lawsuits.