Fidelity National Information Services, Inc. — FY 2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016. The filing is an annual report, not a standalone Q4 filing; it also provides unaudited quarterly results. Unless otherwise noted, amounts are in U.S. dollars.
Business context
FIS provides financial-services technology, payment processing, banking software, consulting and outsourcing services to more than 20,000 clients in over 130 countries. It reports three segments: Integrated Financial Solutions (IFS), Global Financial Solutions (GFS), and Corporate and Other. FY 2016 includes SunGard for the full year, while FY 2015 includes it only from its November 30, 2015 acquisition date, limiting year-over-year comparability.
Key financial results
| Metric | FY 2016 | FY 2015 | Change / context |
|---|---|---|---|
| Revenue | $9.241 billion | $6.596 billion | Up 40.1%, principally reflecting SunGard and other growth; included $192 million of purchase-accounting deferred-revenue reduction and $100 million of adverse FX impact. |
| Gross profit / margin | $3.008 billion / 32.6% | $2.201 billion / 33.4% | Margin declined 0.8 percentage points, partly due to acquired-intangible amortization and incentive compensation. |
| Operating income / margin | $1.298 billion / 14.0% | $1.099 billion / 16.7% | Income rose, but margin declined; integration, acquisition-related costs and amortization weighed on results. |
| Net earnings attributable to FIS | $568 million | $632 million | Down 10.1%. |
| Diluted EPS attributable to FIS | $1.72 | $2.19 | Down from the prior year. |
| Operating cash flow | $1.925 billion | $1.131 billion | Higher primarily because SunGard contributed for a full year. |
| Cash capital expenditures | $616 million | $415 million | Primarily software and property/equipment; approximate cash flow after these expenditures was $1.309 billion. |
| Cash and debt at year-end | $683 million cash; $10.478 billion debt | $682 million cash; $11.444 billion debt | Debt declined; $2.957 billion of revolving borrowing capacity remained available. |
Q4 2016: Revenue was $2.445 billion versus $1.875 billion in Q4 2015; gross profit was $892 million versus $642 million; pretax continuing earnings were $333 million versus $176 million; net earnings attributable to FIS were $207 million versus $105 million; diluted EPS was $0.63 versus $0.35.
Segments and material changes
- IFS: Revenue was $4.566 billion versus $3.846 billion; Adjusted EBITDA was $1.811 billion versus $1.568 billion. Adjusted EBITDA margin declined to 39.7% from 40.8%.
- GFS: Revenue was $4.250 billion versus $2.360 billion; Adjusted EBITDA was $1.292 billion versus $553 million. Adjusted EBITDA margin increased to 30.4% from 23.4%, reflecting SunGard’s higher-margin business and integration progress.
- Corporate and Other: Revenue was $425 million versus $390 million; Adjusted EBITDA loss widened to $158 million from $89 million, including corporate costs and acquisition-related items.
- FIS recorded $281 million of acquisition, integration and severance costs in 2016, compared with $171 million in 2015. Interest expense rose to $403 million from $199 million, primarily due to acquisition financing.
- FIS paid down its 2017 term loans and part of its 2018 term loans and issued $2.5 billion of senior notes in 2016. The company reported no share repurchases during 2016.
Outlook, risks and unusual items
- Management targeted annual SunGard synergy run-rate savings of more than $275 million by the end of 2017. It expected 2017 capital expenditures of approximately 6%–7% of revenue and continued unfavorable foreign-exchange effects on operating income.
- Management said cash plus operating cash flows should fund operating needs, capital expenditures and mandatory debt service for the next 12 months. It expected to continue quarterly dividends, subject to Board discretion and debt covenants.
- FIS completed the sale of its Public Sector and Education businesses on February 1, 2017, for $850 million. It expected approximately $500 million in net cash proceeds and an $85–$90 million pretax gain in Q1 2017; proceeds were expected to reduce debt. The sale was not presented as discontinued operations.
- Key exposures include cybersecurity and service disruption, intense competition and technology shifts, customer and banking-sector consolidation, regulatory and privacy requirements, foreign currency and Brexit-related uncertainty, and the substantial goodwill and acquired-intangible balances. Goodwill was $14.178 billion; management reported no impairment in 2016.
- Contingencies include a $104 million liability, mostly for SunGard-acquired unclaimed-property and tax matters; Brazilian tax claims with approximately $70 million of potential exposure for which FIS recorded no liability; and the DataTreasury patent case, for which the Federal Circuit affirmed patent invalidity and the plaintiff later petitioned the Supreme Court. FIS reported no accrual for that case. The filing also identifies potential tax risk related to SunGard’s prior Availability Services split-off.
- KPMG issued unqualified opinions on the financial statements and internal control over financial reporting; management reported controls were effective as of year-end.
Important facts for investors to verify
- Whether SunGard integration delivers the stated savings target and improves GAAP operating margins after integration costs and acquired-asset amortization.
- Underlying organic growth and segment profitability, separating acquisition contribution, purchase-accounting adjustments and foreign-exchange effects.
- Debt repayment plans, interest costs, revolver usage and the application of Public Sector and Education sale proceeds, including the announced $700 million note redemption.
- Exposure and subsequent developments in Brazilian tax and labor matters, acquired contingencies, and the Availability Services split-off tax risk.
- Actual 2017 foreign-exchange impact, capital spending and adoption effects of the new revenue-recognition standard, which management was still assessing.