Business context and reporting period
Fidelity National Information Services, Inc. (FIS) filed this Form 10-K for the fiscal year ended December 31, 2009. FIS provides banking and payments technology, transaction processing and related services. Approximately 85% of revenue came from multiyear agreements. The company served more than 14,000 financial institutions and business customers in over 100 countries.
FIS acquired Metavante on October 1, 2009; its results are included from that date. The transaction expanded FIS’s banking, payments, wealth-management, healthcare and government-payment offerings. The 2008 comparison reflects the Lender Processing Services (LPS) spin-off as discontinued operations.
Key financial metrics
Amounts are in millions of dollars except per-share data and percentages.
| Metric | 2009 | 2008 |
|---|---|---|
| Revenue | $3,769.5 | $3,427.7 |
| Gross profit / margin | $968.9 / 25.7% | $738.4 / 21.5% |
| Operating income / margin | $277.9 / 7.4% | $323.8 / 9.4% |
| Continuing-operations earnings attributable to FIS common stockholders | $101.3; diluted EPS $0.42 | $110.5; diluted EPS $0.57 |
| Net earnings attributable to FIS | $105.9 | $214.8 |
| Cash from operations | $714.1 | $596.4 |
| Capital expenditures | $212.5 | $255.4 |
| Cash and cash equivalents at year-end | $430.9 | $220.9 |
| Total debt at year-end | $3,253.3 | $2,514.5 |
Fourth-quarter revenue was $1,300.8 versus $858.0 in 2008, while FIS reported a $53.9 net loss attributable to common stockholders versus $28.8 of earnings. The 2009 quarter included a full quarter of Metavante results and impairment and restructuring, integration and merger-related charges.
Operating cash flow less capital expenditures was approximately $501.6 in 2009. Cash included approximately $195.4 held in foreign jurisdictions. Undrawn capacity under the revolving loan and receivables facility totaled $703.4 at year-end; the receivables facility had no outstanding capital. FIS reported compliance with its credit-facility covenants.
Material changes versus the prior comparable period
- Revenue grew 10.0%, primarily reflecting $404.1 of Metavante fourth-quarter revenue; a $53.7 unfavorable foreign-currency impact partly offset growth.
- Gross margin rose 4.2 percentage points, which management attributed to cost reductions, operating efficiencies and initial Metavante synergies. Operating margin nevertheless fell 2.0 points.
- Operating income declined to $277.9 from $323.8. 2009 included $136.9 of impairment charges, mainly a $124.0 trademark impairment following the rebranding, plus $12.9 of software impairment. Restructuring, integration and merger-related charges contributed $108.5 to the year-over-year increase in SG&A.
- Continuing-operations diluted EPS declined to $0.42 from $0.57. Total net earnings attributable to FIS fell to $105.9 from $214.8, with discontinued-operations earnings declining to $4.6 from $104.9.
- Operating cash flow increased by $117.7. The filing says 2008 included $136.7 of LPS operating cash flow; excluding that amount, 2009 cash flow increased by $254.4, reflecting higher earnings before impairment charges, improved working-capital management and collection of retained receivables.
- Debt increased year over year following the Metavante transaction. FIS issued approximately 163.6 million shares as merger consideration and separately raised $250.0 through private placements to THL and FNF.
Outlook, management commentary, risks and unusual items
- Management expected to realize cost and revenue synergies over the 24 months following the Metavante merger; the filing provides no quantified earnings or revenue guidance. Management forecast 2010 capital expenditures at approximately 5%–6% of revenue and expected operating cash flow to cover near-term operating requirements and debt service.
- Management cited recession-related pressure on transaction volumes and discretionary software and professional-services spending. It also noted that declining check use weighs on check-related businesses, while growth in electronic payments supports card, digital-payment and fraud-management services.
- Key risks include high leverage and debt-service demands; bank failures, consolidation and reduced customer activity; technology or service interruptions and cybersecurity or privacy breaches; competition; foreign-exchange exposure; and execution risk in integrating Metavante. Goodwill was $8,232.9, or 58.8% of total assets. The 2009 annual goodwill test found no impairment, but future adverse economic or business changes could require write-downs.
- A significant subsequent development concerns the Brazilian card-processing venture: Banco Santander stopped processing its portfolio on the venture’s systems in late January 2010 and sought to exit. FIS was negotiating exit terms, including a termination payment and treatment of venture notes; Banco Bradesco’s position on the future service arrangement was also under discussion.
- FIS recorded a $19.8 liability related to a Metavante interest-rate swap with Lehman Brothers Special Financing, which was in bankruptcy. The bankruptcy court ordered payments; Metavante appealed, with oral argument expected in the first quarter of 2010. A separate Metavante-merger shareholder suit had a settlement subject to final court approval.
- FIS sold ClearPar on January 1, 2010 for $71.5; the filing reports a $5.7 pretax gain but an after-tax loss of $9.8 due to permanent tax differences. FIS also approved a repurchase authorization of up to 15 million shares in February 2010.
- Management identified related-party arrangements with FNF and LPS; it considered terms fair and reasonable but acknowledged they were not negotiated at arm’s length. KPMG issued unqualified opinions on the financial statements and internal control over financial reporting.
Most important facts for investors to verify
- Whether Metavante integration delivers the anticipated synergies and whether merger-related costs continue to weigh on margins and earnings.
- Whether reported growth persists apart from acquisition contributions, and how transaction volumes, customer spending and foreign exchange affect organic performance.
- Debt maturities and refinancing capacity, particularly the large scheduled 2012 principal payments, interest-rate exposure and covenant headroom.
- The final economic and operating consequences of Banco Santander’s exit from the Brazilian venture and any impact on Banco Bradesco business.
- Potential further impairment of goodwill or acquired intangible assets, and the resolution of the Lehman swap dispute and other disclosed litigation.