Fidelity National Information Services, Inc. (FIS) — 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019. The filing is an annual report, not a standalone Q4 report; it also provides unaudited quarterly results. Figures are in U.S. dollars unless stated otherwise.
Business context
FIS provides technology and processing services to merchants, banks and capital-markets firms. Its reporting segments are Merchant Solutions, Banking Solutions and Capital Market Solutions. On July 31, 2019, FIS completed its acquisition of Worldpay; Worldpay’s results are consolidated from that date. The acquisition substantially changed FIS’s scale, business mix, assets and debt, limiting direct comparison with 2018.
Key financial results
| Metric | 2019 | 2018 |
|---|---|---|
| Revenue | $10.333 billion | $8.423 billion |
| Gross profit / gross margin | $3.723 billion / 36.0% | $2.854 billion / 33.9% |
| Operating income / operating margin | $969 million / 9.4% | $1.458 billion / 17.3% |
| Net earnings attributable to FIS common stockholders | $298 million | $846 million |
| Diluted EPS | $0.66 | $2.55 |
| Cash provided by operating activities | $2.410 billion | $1.993 billion |
| Cash and cash equivalents on balance sheet | $1.152 billion | $703 million |
| Total debt | $20.192 billion | $8.985 billion |
- Revenue increased 22.7%, primarily from Worldpay and growth across business lines. Worldpay contributed $1.722 billion of Merchant revenue after acquisition; its revenue included in FIS’s 2019 statements was $1.880 billion.
- Operating income and net earnings fell despite higher revenue. 2019 included $704 million of acquisition, integration and other costs, $87 million of asset impairments, higher acquired-intangible amortization, and a $217 million charge tied to early debt redemption. The filing also reports $1.444 billion of finite-lived intangible amortization expense.
- Cash from operations rose $417 million year over year. Capital expenditures were $828 million, excluding certain hardware and software financed through other obligations; FIS used $6.629 billion net of acquired cash for the Worldpay acquisition.
- At year-end, 78% of debt was fixed-rate and 22% variable-rate; weighted-average debt cost was 1.66%, with 6.2 years’ weighted-average maturity. A 100-basis-point increase in variable borrowing rates was estimated to add $45 million to annual interest expense.
Segments and material changes
| Segment | 2019 revenue | 2019 Adjusted EBITDA |
|---|---|---|
| Merchant Solutions | $2.013 billion | $994 million |
| Banking Solutions | $5.873 billion | $2.454 billion |
| Capital Market Solutions | $2.447 billion | $1.129 billion |
| Corporate and Other | — | $(373) million |
Adjusted EBITDA is a segment performance measure; it excludes specified acquisition accounting, integration, other costs and impairments. Banking revenue grew 2.8% and Capital Markets revenue grew 2.3%; Merchant’s sharp increase largely reflects Worldpay, which accounted for most of its reported revenue. FIS’s consolidated gross margin improved, while operating margin contracted amid acquisition-related costs and amortization. Segment comparisons were also affected by earlier divestitures, including the Brazilian Venture unwind and sales of Certegy, PS&E and Capco-related businesses.
In Q4 2019, revenue was $3.341 billion versus $2.167 billion in Q4 2018; FIS common-stockholder results were a loss of $158 million, or diluted EPS of $(0.26), versus earnings of $299 million, or $0.91 per diluted share. The filing’s quarterly table does not clearly allocate the annual unusual charges among individual quarters.
Liquidity, outlook, risks and unusual items
- FIS reported $20.2 billion of debt and $1.2 billion of balance-sheet cash at year-end. Cash-flow-statement ending cash was $3.211 billion because it also includes $1.519 billion of restricted merchant float and $540 million of other restricted cash; these amounts are not equivalent to unrestricted liquidity.
- FIS said cash on hand and expected operating cash flows would be sufficient for operating needs, capital expenditures and mandatory debt service over the next 12 months. It had $4.897 billion of remaining borrowing capacity under its revolving facility. Share repurchases were temporarily suspended to prioritize debt repayment; the company expected to continue quarterly dividends, subject to board discretion and restrictions.
- Management said Worldpay integration synergies were ahead of schedule at year-end and anticipated further revenue opportunities and expense efficiencies, but the filing gives no numerical full-year 2020 earnings or revenue guidance. Management expected no material 2020 revenue impact from foreign-exchange translation, while noting uncertainty.
- Management reported more than $170 million in annual run-rate expense reductions from its data-center consolidation program since mid-2016, with a further approximately $80 million targeted from planned closures by the end of 2021. Cloud migration targets were 73% of server compute by year-end 2020 and approximately 80% by year-end 2021.
- Key risks include integration and synergy execution, merchant-platform migration and service disruption, cybersecurity and privacy, competition and transaction volumes, regulation of payments and interchange, currency and interest-rate movements, and substantial acquisition-related goodwill and intangible assets. Goodwill was $52.2 billion, or 62% of total assets; no impairment was identified in the 2019 annual assessment.
- The Worldpay acquisition accounted for approximately 73% of year-end assets and 18% of 2019 revenue. Management’s and the auditor’s internal-control assessments excluded Worldpay’s controls during the permitted post-acquisition period; FIS otherwise reported effective internal control over financial reporting.
- Disclosed contingencies include a $564 million Tax Receivable Agreement liability. Reliance Trust litigation plaintiffs alleged approximately $115 million in damages, and Brazilian tax claims presented potential exposure of approximately $64 million; FIS stated it had not accrued liabilities for these matters because losses were not considered probable.
- The filing discussed the COVID-19 outbreak as a potential business risk, but could not assess its future impact. It also described Brexit-related uncertainty and ongoing UK card-acquiring and EU interchange reviews.
Important facts for investors to verify
- How much of reported growth and Merchant profitability is attributable to Worldpay versus organic growth, and whether announced synergies are realized.
- The expected trajectory of integration costs, acquired-intangible amortization, debt reduction and interest expense.
- Unrestricted cash and settlement-related liquidity needs, alongside short-term borrowings, debt maturities and revolving-credit availability.
- Worldpay integration and control remediation progress, including merchant-platform migration and cybersecurity exposure.
- The development and resolution of the TRA, litigation and tax contingencies, and potential impairment sensitivity of goodwill and acquired intangibles.