Business context and reporting period
Fidelity National Information Services, Inc. (FIS) filed this Form 10-K for the fiscal year ended December 31, 2020. FIS provides technology and processing services to merchants, banks and capital-markets firms through Merchant, Banking, Capital Markets, and Corporate and Other segments. The filing also reports fourth-quarter results; it is an annual report, not a standalone quarterly filing.
Results include Worldpay for all of 2020, compared with only the period from its July 31, 2019 acquisition through year-end in 2019. FIS also acquired a 70% interest in Virtus Partners in January 2020.
Financial performance and liquidity
| Metric | FY 2020 | FY 2019 |
|---|---|---|
| Revenue | $12.552 billion | $10.333 billion |
| Gross profit / margin | $4.204 billion / 33% | $3.723 billion / 36% |
| Operating income / margin | $552 million / 4% | $969 million / 9% |
| Net earnings attributable to FIS common stockholders | $158 million | $298 million |
| Diluted EPS | $0.25 | $0.66 |
| Cash from operating activities | $4.442 billion | $2.410 billion |
| Capital expenditures | $1.129 billion | $828 million |
Revenue rose 21%, primarily from Worldpay, but operating income fell 43% and net earnings attributable to FIS fell 47%. Higher acquired-intangible amortization, acquisition and integration costs, and impairments weighed on operating results. The effective tax rate was 36%, compared with 24% in 2019, including a one-time U.K. deferred-tax remeasurement. Operating cash flow less reported capital expenditures was approximately $3.313 billion in 2020; this is a simple derived measure, not a company-reported free-cash-flow figure.
Fourth-quarter 2020 revenue was $3.316 billion, gross profit $1.206 billion, net earnings attributable to FIS common stockholders $103 million, and diluted EPS $0.16. The prior-year fourth quarter reported a net loss attributable to FIS of $158 million and diluted loss per share of $0.26.
At year-end, balance-sheet cash and cash equivalents were $1.959 billion, total debt was approximately $20.015 billion, and reported available liquidity was $4.6 billion, including $2.641 billion of revolver capacity. The cash-flow statement reports $4.030 billion of cash and cash equivalents because it includes merchant float and other restricted cash; these figures have different scopes. Debt carried a 1.7% weighted-average interest rate; 74% was fixed-rate. A 100-basis-point increase in rates on variable-rate debt would, by the filing’s sensitivity estimate, increase annual interest expense by $51 million.
Segments and changes versus prior period
- Merchant: Revenue was $3.767 billion, up 94%, chiefly because 2020 includes a full year of Worldpay. Adjusted EBITDA was $1.752 billion, with margin declining to 46.5% from 49.8%; pandemic-driven declines in higher-margin transaction volumes contributed to the margin drop.
- Banking: Revenue increased 6% to $5.944 billion; adjusted EBITDA increased 6% to $2.556 billion, with margin flat at 43.0%. Growth included core and digital banking demand and pandemic-related programs, including PPP loan processing.
- Capital Markets: Revenue increased 5% to $2.440 billion; adjusted EBITDA increased 7% to $1.147 billion and margin rose to 47.0%.
- Corporate and Other: Revenue declined 17% to $401 million. Adjusted EBITDA loss narrowed to $195 million from $238 million, reflecting lower discretionary costs and expense synergies, partly offset by non-strategic business declines.
Operating cash flow increased substantially, partly due to Worldpay operations and the timing of settlement activity. Capital expenditures increased to $1.129 billion. The share count and acquisition-related amortization also changed materially after Worldpay, so reported EPS and year-over-year comparisons are affected by transaction timing and purchase accounting.
Outlook, management commentary, risks and unusual items
- Management said it expected to reach its target leverage in 2021 and expected cash plus operating cash flow over the next 12 months to cover operating needs, capital expenditures and mandatory debt service. The filing does not provide a specific revenue or earnings forecast.
- Management said Worldpay revenue synergies remained on track to meet or exceed targets, expense synergies had exceeded the original target, and further expense synergies were expected in 2021.
- COVID-19 reduced Merchant payment volumes, especially in travel, airlines and restaurants, and also affected Banking transaction volumes and client decisions on sales, implementations, licenses and professional services. Management said the duration and ultimate financial impact remained uncertain. Cost actions reduced expenses by about $300 million in 2020, including approximately $220 million of lower incentive compensation, which management did not expect to recur in 2021.
- Goodwill was $53.3 billion, about 64% of total assets. FIS recorded $94 million of goodwill impairment and $42 million of long-lived-asset impairment in 2020. Merchant reporting-unit fair value exceeded carrying value by only about 4%; a hypothetical 100-basis-point increase in the discount rate would have put estimated fair value below carrying value, creating risk of future impairment.
- Other key risks include cybersecurity and service interruptions, merchant defaults and chargebacks, competition and pricing pressure, regulatory and privacy-law changes, foreign-exchange exposure, acquisition integration, and refinancing or interest-rate risk. FIS disclosed approximately $43 million of potential Brazilian tax claims for which it had not recorded a liability because it did not consider a loss probable; it stated that a reasonable estimate of possible future chargeback losses could not be made.
- A $39.8 million settlement of Reliance Trust litigation was recorded in 2020, subject to final court approval. Total asset impairments were $136 million. FIS reported no off-balance-sheet arrangements and stated that its financial statements and internal control over financial reporting received unqualified audit opinions.
- The Board raised the quarterly dividend 11% to $0.39 beginning in 2021 and authorized repurchases of up to 100 million shares. FIS suspended repurchases during 2020 while prioritizing debt repayment; future dividends and repurchases remain subject to Board discretion and other restrictions.
Most important facts for investors to verify
- How much of 2020 revenue growth and operating cash flow reflects Worldpay consolidation and settlement timing, versus sustainable organic growth?
- Whether Merchant volumes recover and the small reported goodwill valuation cushion remains adequate under updated forecasts and discount rates.
- Whether management achieves its 2021 leverage target while funding investment, debt service, dividends and any share repurchases.
- The continuing effects of pandemic-related merchant credit, chargebacks, client implementation delays and discretionary-spending weakness.
- Future acquisition-related amortization, integration costs, expense synergies and the treatment of non-GAAP segment Adjusted EBITDA relative to GAAP earnings.