Fidelity National Information Services, Inc. — 2010 Form 10-K
Reporting period: Fiscal year ended December 31, 2010; filed February 25, 2011. This is an annual report, not a standalone fourth-quarter filing. Amounts are in U.S. dollars unless otherwise stated.
Business context
FIS provides banking, payments, and financial technology processing and software to more than 14,000 financial institutions and businesses in over 100 countries. Its segments are Financial Solutions Group (FSG), Payment Solutions Group (PSG), International Solutions Group (ISG), and Corporate and Other. Approximately 85% of revenue is historically recurring. The 2010 results include a full year of Metavante, acquired October 1, 2009, and a partial month of Capco, acquired December 2, 2010.
Key financial metrics
| Metric | FY 2010 | FY 2009 |
|---|---|---|
| Revenue | $5,269.5 million | $3,711.1 million |
| Gross profit / gross margin | $1,631.8 million / 31.0% | $969.6 million / 26.1% |
| Operating income / operating margin | $801.1 million / 15.2% | $285.6 million / 7.7% |
| Continuing-operations diluted EPS attributable to common stockholders | $1.27 | $0.44 |
| Net earnings attributable to FIS | $404.5 million | $105.9 million |
| Total diluted EPS | $1.15 | $0.44 |
| Cash from operating activities | $1,071.3 million | $714.1 million |
| Capital expenditures | Approximately $314 million | Approximately $213 million |
| Cash and cash equivalents at year-end | $338.0 million | $430.9 million |
| Total debt at year-end | $5,192.1 million | $3,253.3 million |
Year-end total assets were $14,161.8 million and total equity was $6,561.6 million. Operating cash flow less capital expenditures was approximately $757 million; this is a simple cash-flow measure, not a company-reported free-cash-flow metric. The company had $713.7 million of unused revolving borrowing capacity, net of letters of credit, and reported compliance with credit-agreement covenants. About $176.1 million of cash was held by foreign entities.
Segment revenue in 2010 was $1,890.8 million for FSG, $2,478.1 million for PSG, and $917.0 million for ISG. Segment operating margins were 35.4%, 33.7%, and 7.8%, respectively.
Material changes versus prior period
- Revenue increased 42.0%, primarily because 2010 included a full year of Metavante versus only the fourth quarter in 2009. Management also cited $83.3 million of Brazilian Venture termination-fee revenue, $23.4 million from 2010 acquisitions, and a $26.4 million favorable currency effect; declines in paper-based retail check activity partly offset growth.
- Gross and operating margins improved, reflecting Metavante cost synergies, cost controls, and the Brazilian termination fee. Comparability is also affected by acquisition-related costs and impairments.
- FIS completed a leveraged recapitalization and repurchased 86.2 million shares for approximately $2.5 billion through a Dutch auction tender offer. Debt rose by approximately $1.9 billion year over year, while FIS stockholders’ equity fell from $8,308.9 million to $6,403.2 million.
- Operating cash flow rose by $357.2 million. Investing cash flow was negative $644.2 million, including $403.2 million of net acquisition outflows; financing cash flow was negative $519.0 million, including $2,545.5 million of treasury-stock purchases.
- Fourth-quarter revenue was $1,396.3 million versus $1,283.0 million in fourth-quarter 2009. Fourth-quarter 2010 net earnings attributable to FIS were $110.6 million, compared with a $53.9 million loss in fourth-quarter 2009; the prior-year quarter included significant impairment and restructuring/integration effects.
Outlook, commentary, risks, and unusual items
- Management expected further Metavante cost and revenue synergies through 2011, but anticipated a smaller year-over-year synergy contribution. No specific 2011 revenue or earnings guidance was provided. FIS expected capital expenditures of approximately 6% of 2011 revenue, including acquisition integration spending.
- Management cautioned that Capco’s consulting services have lower margins than FIS’s other solutions and would reduce the proportion of recurring revenue in 2011. The filing also describes cautious expectations for broad economic improvement, continued bank failures, and further bank consolidation.
- Banco Santander exited the Brazilian Venture. FIS recorded an $83.3 million termination fee, impaired $140.3 million of contract intangible assets and wrote off $14.6 million of related software. The combined items increased 2010 net earnings attributable to FIS by approximately $17.2 million, or $0.05 per share.
- Total 2010 impairment charges were $154.9 million in continuing operations, principally related to Santander’s exit. Separately, discontinued Brazilian Participacoes operations recorded a $25.0 million impairment and a $63.5 million pretax loss for 2010. FIS was pursuing strategic alternatives for Participacoes.
- Capco’s acquisition consideration was reported at $411.5 million, including contingent consideration. The maximum contingent consideration payout is $232.2 million; additional employee incentive arrangements also create potential future payments.
- Key risks include substantial leverage and variable-rate exposure; acquisition integration and synergy execution; cybersecurity, privacy, service disruption, and processing risks; customer consolidation and pricing pressure; foreign-exchange exposure; litigation and tax contingencies; and regulatory changes. The proposed Durbin-related debit interchange rules were expected to take effect in 2011; FIS said direct earnings exposure was limited because interchange fees are primarily pass-through, but indirect effects on customers and transaction volumes were uncertain.
- Goodwill was $8,550.0 million, or 60.4% of total assets. Management reported no goodwill impairment in its 2010 annual assessment, but adverse business or economic changes could require future write-downs. The auditor expressed an unqualified opinion on the financial statements and internal controls; management also concluded internal controls were effective.
Important facts for investors to verify
- Separate acquisition-driven growth and one-time Brazilian Venture revenue from underlying organic and recurring revenue trends.
- Assess whether reported margin gains and earnings persist without the Santander termination fee and as Metavante synergies mature; monitor Capco’s lower-margin contribution.
- Review debt maturities, interest costs, covenant headroom, and refinancing needs, particularly the scheduled 2012 and 2014 term-loan repayments.
- Track the outcome and potential losses, if any, in the Searcy Fair Credit Reporting Act class action; the filing says a possible loss range could not be estimated.
- Monitor Participacoes’ disposition or restructuring, Capco contingent consideration and incentives, and possible indirect effects of debit interchange regulation.