Fidelity National Information Services, Inc. — 2013 Form 10-K
Reporting period: Fiscal year ended December 31, 2013. The filing also presents unaudited fourth-quarter results. FIS provides banking and payment technology, processing, outsourcing and consulting services to more than 14,000 institutions in over 100 countries.
Financial performance
| Metric | 2013 | 2012 | Change |
|---|---|---|---|
| Revenue | $6,070.7 million | $5,807.6 million | Up 4.5% |
| Gross profit / margin | $1,985.1 million / 32.7% | $1,860.7 million / 32.0% | Margin up 0.7 percentage points |
| Operating income / margin | $1,064.4 million / 17.5% | $1,079.2 million / 18.6% | Income down 1.4%; margin down 1.1 points |
| Continuing-operations net earnings | $515.8 million | $560.3 million | Down 7.9% |
| Net earnings attributable to FIS | $493.1 million | $461.2 million | Up 6.9% |
| Diluted EPS attributable to FIS | $1.68 | $1.55 | Up 8.4% |
| Cash flow from operations | $1,060.3 million | $1,046.7 million | Up $13.6 million |
| Cash and cash equivalents | $547.5 million | $517.6 million | Up $29.9 million |
| Debt | $4,468.6 million | $4,385.5 million | Up $83.1 million |
Revenue growth reflected transaction and processing volume growth, consulting demand, acquisitions and higher termination fees. Foreign exchange reduced 2013 revenue by $49.6 million. FSG revenue rose 4.4% to $2,344.4 million and its operating margin increased to 33.3%; PSG revenue rose to $2,454.9 million and margin to 39.0%. ISG revenue rose to $1,273.9 million, but reported operating income declined to $197.8 million and margin to 15.5%, partly reflecting acquisition-related and restructuring charges.
Capital expenditures were approximately $336.2 million. Investing activities used $464.7 million, including $150.5 million for acquisitions and equity investments; financing activities used $546.0 million, including $475.9 million of share repurchases and $256.3 million of dividends paid. The company reported $1,970.2 million of remaining revolving-credit borrowing capacity. Management said cash, operating cash flow and borrowing programs should cover expected operating needs, capital spending and mandatory debt service for the next 12 months. Approximately $368.9 million of cash was held by foreign entities and would generally be subject to U.S. income tax if repatriated.
Fourth-quarter comparison
Fourth-quarter 2013 revenue was $1,578.5 million, versus $1,500.1 million in fourth-quarter 2012. Gross profit increased to $523.7 million from $492.6 million. Continuing-operations pretax earnings were $179.9 million, compared with $232.3 million; net earnings attributable to FIS were $71.9 million, versus $136.7 million; diluted EPS was $0.25, versus $0.46.
Material changes, outlook and risks
- Operating income and continuing-operations earnings fell despite revenue and gross-margin growth. SG&A included $131.1 million in Capco acquisition-related adjustments; the charge also contributed to a higher effective tax rate of 37.5%, compared with 32.6% in 2012. Interest expense declined to $198.6 million from $231.3 million, but refinancing included a $45.3 million net early-redemption charge and other debt-related costs.
- Management expected consulting-services revenue growth to continue in 2014 and planned an incremental $30 million investment to pursue large global financial institutions. It expected 2014 capital expenditures of approximately 5.5%–6% of revenue. Mobile banking and payments, international outsourcing and financial-institution technology spending were identified as opportunities; declining check use, customer losses and industry consolidation as pressures.
- The board raised the quarterly dividend to $0.24 per share beginning in 2014 and authorized up to $2.0 billion of repurchases through December 31, 2017. Future dividends and repurchases remain subject to board discretion, cash needs and debt covenants.
- Information security is a significant exposure. Federal agencies issued a confidential report following an examination of FIS information security, risk management and internal audit functions; FIS described remediation efforts and reported no material effect on 2013 sales closures or its pipeline, but could not predict future regulatory or client effects.
- Goodwill was $8.5 billion, or 60.9% of assets. The 2013 impairment assessment found no goodwill impairment; management cautioned that adverse economic or business changes could require future write-downs.
- Banco Bradesco-related Brazilian Venture revenue was $296.2 million. Early termination could reduce future revenue and trigger costs, including potential labor claims. Separately, approximately 1,080 active labor claims remained from the discontinued Brazilian item-processing operation; the accrued liability, net of court-ordered deposits, was $29.2 million.
- Two material patent matters were disclosed, and FIS could not estimate a possible loss range for either. The CheckFree/CashEdge litigation was stayed pending patent-office review; the DataTreasury matter concerned image-based check processing. The filing also identifies cyber incidents, transaction-settlement losses, foreign-exchange exposure, regulation, customer consolidation, debt and refinancing as risks.
Investor verification priorities
- Review the Capco contingent-consideration and incentive-plan charges, remaining payment obligations, and their effect on reported margins and taxes.
- Assess the 2014 refinancing and debt-maturity profile, variable-rate exposure, available revolver capacity and dividend or repurchase flexibility.
- Track remediation and any subsequent regulator or client actions related to the information-security examination.
- Monitor Brazilian Venture contract terms, Bradesco concentration, and the reserve and outcomes for Brazilian labor claims.
- Follow the patent cases, goodwill and intangible-asset impairment indicators, and trends in transaction volumes, check processing and consulting margins.
KPMG issued unqualified opinions on the consolidated financial statements and internal control over financial reporting; management also reported effective disclosure controls and financial-reporting controls as of year-end.