FIS 2014 Form 10-K Summary
Business context and reporting period
Fidelity National Information Services, Inc. (FIS) provides banking and payments technology, processing, consulting and outsourcing services to more than 14,000 institutions in over 100 countries. This is the annual report for the fiscal year ended December 31, 2014; it includes fourth-quarter results but is not a Q4-only filing. FIS reported through Financial Solutions Group (FSG), Payment Solutions Group (PSG), International Solutions Group (ISG), and Corporate and Other. Gary Norcross became CEO effective January 1, 2015.
Financial performance and liquidity
| Metric | 2014 | 2013 |
|---|---|---|
| Revenue | $6,413.8 million | $6,063.4 million |
| Gross profit / gross margin | $2,081.1 million / 32.4% | $1,970.7 million / 32.5% |
| Operating income / operating margin | $1,270.6 million / 19.8% | $1,062.9 million / 17.5% |
| Net earnings attributable to FIS | $679.1 million | $493.1 million |
| Diluted EPS | $2.35 | $1.68 |
| Cash from operations | $1,164.9 million | $1,060.3 million |
| Capital expenditures | $371.2 million | $336.2 million |
Annual revenue increased 5.8%; FIS attributed growth principally to consulting and implementation demand, acquisitions and international expansion, partly offset by $37.4 million of unfavorable currency impact. Net earnings attributable to FIS rose about 38%. The 2013 comparison included $131.1 million of Capco acquisition-related charges in SG&A; 2014 SG&A also included $21.5 million of acquisition integration and other severance costs. Gross margin was nearly flat as higher-margin processing growth was offset by increased lower-margin consulting revenue.
Fourth-quarter 2014 revenue was $1,689.1 million, versus $1,573.3 million a year earlier. Net earnings attributable to FIS were $195.3 million, or diluted EPS of $0.68, compared with $71.9 million, or $0.25, in Q4 2013.
At year-end, cash and cash equivalents were $492.8 million and total debt was $5,067.7 million, up from $4,468.6 million in 2013. Cash less total debt was approximately $4,574.9 million (derived). FIS reported $2,204.2 million of remaining revolver capacity and said cash, operating cash flow and borrowing facilities should cover expected operating needs, capital spending and mandatory debt service for the next 12 months. About $310.5 million of cash was held by foreign entities. The company paid $275.1 million in dividends and spent $475.5 million on repurchases in 2014; no shares were repurchased in Q4.
Material changes and segment results
- FSG revenue grew 6.4% to $2,494.0 million; operating margin declined to 32.7% from 33.3%, mainly reflecting lower prior-year termination fees.
- PSG revenue grew to $2,504.8 million; operating margin eased to 38.5% from 39.0%, also primarily due to lower termination fees.
- ISG revenue grew to $1,417.3 million, including $32.0 million of unfavorable currency impact; operating margin improved to 16.7% from 15.5%, partly because 2013 included special charges.
- Acquisition cash outlays were $595.2 million. Notable 2014 acquisitions included Clear2Pay for $461.5 million and Reliance for $110.0 million.
- FIS issued $1.0 billion of notes in 2014 and redeemed $500 million of 2020 notes, incurring a reported $35.4 million pre-tax extinguishment charge. Interest expense declined to $172.8 million from $198.6 million, primarily due to refinancing at lower borrowing rates.
- FIS recorded a $16.2 million loss on a foreign currency forward contract related to the Clear2Pay purchase price. Discontinued operations produced an $11.4 million net loss in 2014.
Outlook, commentary, risks and contingencies
- Management expected consulting and professional-services growth to continue in 2015 and planned to sustain investment in sales, management and account resources targeting large global financial institutions. It cautioned that a larger consulting mix can reduce gross margin and the proportion of recurring revenue.
- FIS expected 2015 capital expenditures of approximately 5.5%–6% of revenue. Management anticipated a moderate increase in unfavorable foreign-exchange impact on operating income as the U.S. dollar strengthened.
- Management viewed mobile and faster payments, integrated digital banking and EMV chip-card migration as opportunities, while noting uncertainty about which mobile-payment technologies will succeed. Declining check use remains a headwind; FIS said cost and fraud-efficiency measures had mitigated much of the impact.
- Information security is a significant risk. Federal regulators issued a confidential report in 2014 concerning examinations of FIS’s information security, risk management and internal audit functions. FIS said it responded to findings and did not believe the matter materially affected 2014 sales closures or its pipeline, but could not predict future regulator or client actions or their effects.
- Banco Bradesco accounted for $277.4 million of 2014 revenue through the Brazilian venture. The partner can terminate or partially terminate the agreement before its 2020 end date; minimum payments and performance provisions may apply. A termination could also expose FIS to labor claims involving Brazilian employees.
- Goodwill was $8,877.6 million, approximately 61% of total assets. FIS reported no goodwill impairment in its 2014 assessment, but an economic downturn or weaker outlook could require future impairment charges.
- Patent litigation remains a contingency. In the CheckFree/CashEdge matter, the PTAB held all claims of four asserted patents unpatentable in December 2014; appeals could affect the outcome. The possible loss in the separate DataTreasury patent case was not estimable, and proceedings were stayed pending patent review.
- FIS disclosed approximately $68 million of potential Brazilian tax-claim exposure tied to a former operation; it considered loss possible but not probable or reasonably estimable and recorded no reserve. Approximately 790 labor claims relating to the former Brazilian item-processing operation remained active, with a net accrued liability of $17.6 million.
- The board approved an 8% dividend increase to $0.26 per share per quarter beginning in Q1 2015. Future dividends remain subject to board discretion and debt-agreement restrictions.
Most important facts for investors to verify
- Whether the regulatory information-security findings prompt additional client, regulator or remediation costs, and whether sales or retention are affected.
- The sustainability of earnings growth given acquisition contributions, consulting mix, termination-fee variability, foreign-exchange pressure and share repurchases.
- Debt maturities, borrowing costs, covenant headroom and the company’s ability to fund acquisitions, capital spending and shareholder returns while carrying $5.1 billion of debt.
- The Brazilian venture’s contract and client concentration risk, including potential termination payments and labor-claim exposure.
- Developments in the DataTreasury litigation, appeals in the CheckFree/CashEdge matter, and the unreserved Brazilian tax claims.
- Goodwill recoverability and the impact of the planned 2015 investment and capital-spending levels on cash generation.