Fidelity National Information Services, Inc. — 2012 Form 10-K
Reporting period: Fiscal year ended December 31, 2012. This is an annual report, not a standalone quarterly filing; selected fourth-quarter results are included below. Amounts are in U.S. dollars.
Business context
FIS provides banking and payment-processing technology, software, services and outsourcing to more than 14,000 institutions in over 100 countries. Its reporting segments are Financial Solutions Group (FSG), Payment Solutions Group (PSG), International Solutions Group (ISG), and Corporate and Other. Management reported that recurring services historically represented about 80% of revenue, though transaction-based fees fluctuate with activity.
Financial performance and liquidity
| Metric | FY 2012 | FY 2011 | Change / context |
|---|---|---|---|
| Revenue | $5,807.6 million | $5,625.6 million | Up 3.2%; growth from processing volumes and professional and consulting services was partly offset by lower check-related activity and $100.8 million of unfavorable foreign-exchange impact. |
| Gross profit / margin | $1,860.7 million / 32.0% | $1,706.5 million / 30.3% | Margin improved 1.7 percentage points, attributed to operating leverage and cost management. |
| Operating income / margin | $1,079.2 million / 18.6% | $1,049.5 million / 18.7% | Income rose 2.8%; margin was slightly lower. |
| Continuing-operations earnings attributable to FIS common stockholders | $540.4 million; diluted EPS $1.82 | $483.1 million; diluted EPS $1.57 | Improved year over year. |
| Net earnings attributable to FIS common stockholders | $461.2 million; diluted EPS $1.55 | $469.6 million; diluted EPS $1.53 | Net income fell despite higher continuing earnings, principally reflecting larger discontinued-operations losses. |
| Cash from operating activities | $1,046.7 million | $1,171.5 million | Down $124.8 million, primarily due to taxes paid on the healthcare-business sale and settlement timing. |
| Capital expenditures | $296.1 million | $300.3 million | Management expected 2013 spending of approximately 5–6% of revenue. |
| Cash and debt at year-end | $517.6 million cash; $4,385.5 million debt | $415.5 million cash; $4,809.8 million debt | Debt declined $424.3 million. About $282.1 million of 2012 cash was held by foreign entities; much domestic cash was tied to settlement timing. |
Current assets were $1,844.2 million and current liabilities were $1,256.8 million at year-end. The company reported $1,022.9 million of remaining revolver borrowing capacity. Management said cash, operating cash flow and borrowing programs were expected to meet operating and debt-service needs for the next 12 months and foreseeable needs.
Segments and fourth-quarter results
- FSG: Revenue $2,246.4 million, up 8.2%; operating margin 31.9%, down from 32.8%. Growth included core processing, eBanking, mobile banking, risk solutions and consulting; margin pressure reflected fewer higher-margin software licenses and security/infrastructure spending.
- PSG: Revenue $2,380.6 million, nearly flat; operating margin improved to 37.0% from 34.7%. Electronic payment growth was offset by weaker item processing and check activity and a large debit-client deconversion.
- ISG: Revenue $1,180.5 million, nearly flat as reported; operating margin rose to 17.1% from 15.9%. Revenue was reduced by $99.7 million of unfavorable foreign exchange; management cited growth in Brazil, consulting and India ATM management.
- Fourth quarter 2012: Revenue was $1,500.1 million versus $1,461.3 million in Q4 2011; gross profit was $492.6 million versus $473.2 million; net earnings attributable to FIS common stockholders were $136.7 million versus $117.0 million; diluted EPS was $0.46 versus $0.39.
Material changes, outlook and risks
- FIS sold its Healthcare Benefit Solutions Business for $332.2 million in August 2012. The sale generated a $22.0 million pretax gain but $78.3 million of tax expense; discontinued operations reported a $47.8 million loss for the business in 2012.
- Brazilian Participacoes wind-down costs included $39.1 million of 2012 charges for potential labor claims. At year-end, approximately 1,550 claims were active; the accrued liability, net of court-ordered deposits, was $41.4 million.
- FIS incurred $43.2 million of executive compensation and accelerated-vesting charges in 2012. No impairment charges were recorded in 2012; goodwill was $8,381.5 million, approximately 61.9% of total assets.
- Management was cautious about broader economic improvement but expected banks to continue investing in technology. It anticipated ongoing bank consolidation, which could either expand FIS business or lead to lost clients, reduced services or pricing pressure. The M&I/BMO Harris consolidation was expected to have a substantially offset 2013 impact through termination and settlement fees, professional services and other activities; management planned to mitigate later effects.
- Key risks include cyberattacks and service disruptions, evolving financial regulation, transaction-volume sensitivity, customer consolidation and contract renewals, competition, foreign-exchange exposure, debt obligations, and Brazilian venture and labor-claim exposures. The 2011 cyber-incident caused approximately $13.0 million of unauthorized Sunrise prepaid-card transactions. A subsequent investigation indicated limited data affecting a small number of customers may have been accessed; investigation and customer communications were ongoing. A final regulatory examination report was pending.
- A patent-infringement case brought by Fiserv subsidiaries remained in discovery, with trial scheduled for January 2014; FIS said a possible loss or range could not be estimated. The filing also disclosed upstream-affiliate activity in Iran by Bausch & Lomb, which FIS said it neither participated in nor received revenue from.
- Subsequent event: FIS agreed to acquire the remaining interest in mFoundry for approximately $120 million cash, subject to customary approvals and closing conditions, with closing expected by the end of Q1 2013.
Investor verification priorities
- Reconcile reported net earnings with continuing-operations earnings, especially the healthcare-sale tax charge and other discontinued operations.
- Review operating cash-flow drivers, settlement-related cash restrictions, debt maturities, revolver availability and dividend/buyback cash demands.
- Track the cyber-incident investigation, regulatory follow-up, customer impacts and any resulting costs or litigation.
- Assess the development of Brazilian labor claims and the termination and performance provisions of the Bradesco venture.
- Verify whether the projected M&I/BMO Harris offsets, 2013 capital-spending expectations and mFoundry acquisition timing were realized.
- Consider that goodwill and other intangible assets are substantial and subject to impairment if operating or market assumptions weaken. KPMG issued unqualified opinions on the financial statements and internal control over financial reporting; management also concluded disclosure controls were effective.