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FIDELITY NATIONAL INFORMATION SERVICES, INC. - 10-K - Management's Discussion and Analysis of Financial Condition and Results of Operations
(Edgar Glimpses Via Acquire Media NewsEdge)
The following section discusses management's view of the financial condition and
results of operations of FIS and its consolidated subsidiaries as of
December 31, 2012 and 2011 and for the years ended December 31, 2012, 2011 and
2010.
This section should be read in conjunction with the audited Consolidated
Financial Statements and related Notes of FIS included elsewhere in this Annual
Report. This Management's Discussion and Analysis of Financial Condition and
Results of Operations contains forward-looking statements. See "Forward-Looking
Statements" and "Risk Factors" for a discussion of the uncertainties, risks and
assumptions associated with these forward-looking statements that could cause
future results to differ materially from those reflected in this section.
Overview
FIS is a leading global provider dedicated to banking and payments technologies.
With a long history deeply rooted in the financial services sector, FIS serves
more than 14,000 institutions in over 100 countries. Headquartered in
Jacksonville, Florida, FIS employs more than 35,000 people worldwide and holds
leadership positions in payment processing and banking solutions, providing
software, services and outsourcing of the technology that drives financial
institutions. FIS topped the 2012 and 2011 annual FinTech 100 list, is a member
of the Fortune 500 U.S. and of Standard and Poor's (S&P) 500® Index. We have
four reporting segments: FSG, PSG, ISG and Corporate and Other. A description of
these segments is included above in Item 1. Business and the results of
operations of our segments are discussed below in Segment Results of Operations.
Business Trends and Conditions
Our revenue is derived from a combination of recurring services, professional
services and software license fees. Recurring services, which have historically
represented approximately 80% of our revenue, are provided under multi-year
contracts that contribute relative stability to our revenue stream. However, a
significant portion of these recurring revenues are derived from transaction
processing fees that fluctuate with the level of deposit and card transactions
associated with consumer and commercial activity. Sales of software licenses
and professional services are less predictable and a portion can be regarded as
discretionary spending by our customers. We continually seek opportunities to
enhance revenues and to manage our costs and capital expenditures prudently in
light of any shifting revenue trends and in response to broader economic
conditions.
We acquired Capco in December 2010 to broaden our capabilities to provide
strategic and business transformation consulting. While Capco has generated
increased revenues, the lower profit margin realized for professional services
as compared to our other solutions has resulted in profit margin compression.
The addition of Capco has also reduced the relative proportion of our recurring
revenue stream.
As the payment market continues to evolve from paper-based to electronic, we
continue to add new services responsive to this trend. Card transactions
continue to increase as a percentage of total point-of-sale payments, which
fuels continuing demand for card-related services. In recent years, we have
added a variety of stored-value card types, internet banking, mobile solutions,
and electronic bill presentment/payment services, as well as a number of card
enhancement and loyalty/reward programs. The common goal of these offerings
continues to be convenience and security for the consumer, coupled with value to
the financial institution. The evolution to electronic transactions also
intensifies the vulnerability to fraud, increasing the demand for our risk
management solutions. At the same time, the use of checks continues to decline
as a percentage of total payments, which negatively impacts our check warranty
and item-processing businesses.
We compete for both licensing and outsourcing business, and thus are affected by
the decisions of financial institutions to utilize our services under an
outsourced arrangement or to process in-house under a software license and
maintenance agreement. As a provider of outsourcing solutions, we benefit from
multi-year recurring revenue streams, which help moderate the effects of
year-to-year economic changes on our results of operations. One of the current
trends in the financial services industry from which we are benefiting is the
migration by our clients to an outsourced model to improve their profitability.
While we are cautious regarding broader economic improvement, we expect banks to
continue investing in new technology and believe we are well positioned to
capitalize as the overall market continues to recover. We anticipate
consolidation within the banking industry will continue, including additional
bank failures and continuing merger and acquisition activity. As a whole,
consolidation activity is detrimental to our business. However, consolidation
resulting from specific merger and acquisition transactions may be beneficial or
detrimental to our business. When consolidations occur, merger partners often
operate disparate systems licensed from competing service providers. The newly
formed entity generally
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makes a determination to migrate its core and payments systems to a single
platform. When a financial institution processing client is involved in a
consolidation, we may benefit by expanding the use of our services if such
services are chosen to survive the consolidation and support the newly combined
entity. Conversely, we may lose market share if we are providing services to
both entities, or we are not the merging parties' provider of core or payment
processing, or if a customer of ours is involved in a consolidation and our
services are not chosen to survive the consolidation and support the newly
combined entity. It is also possible that larger financial institutions
resulting from consolidation would have greater leverage in negotiating terms or
could decide to perform in-house some or all of the services that we currently
provide or could provide. We seek to mitigate the risks of consolidations by
offering other competitive services to take advantage of specific opportunities
at the surviving company.
The acquisition of M&I Bank by BMO Harris Bank, both of whom are customers of
FIS, is a consolidation that will have a financial impact on the Company. We
disclosed in our June 30, 2012 Form 10-Q that we estimated a decline in annual
EBITDA run rate of approximately $60.0 million, and that we expected the 2013
impact to be approximately half that amount. We now expect that the 2013 impact
will be substantially offset by termination and settlement fees, additional
professional services from BMO Harris Bank and other activities expected to
occur with BMO Harris Bank. We will continue to work towards reducing the impact
in 2014 and beyond by expanding services to BMO Harris Bank, adding new
customers and selling additional products and services to existing clients.
The Dodd-Frank Act and associated Durbin Amendment were passed and signed into
law in 2010. The Dodd-Frank Act represents a comprehensive overhaul of the
regulations governing the financial services industry within the United States,
established the new Federal Consumer Financial Protection Bureau and will
require this and other federal agencies to implement many new regulations.
Regulations under the Durbin Amendment, released by the Federal Reserve in June
2011, mandate a cap on debit transaction interchange fees on cards issued by
financial institutions with assets greater than $10.0 billion. This legislated
interchange fee cap has the potential to alter the type and/or volume of
card-based transactions that we process on behalf of our customers, but has had
an insignificant impact thus far. As we continue to monitor the market
participants' actions, we believe we are competitively positioned to offset or
take advantage of any potential shifts in payment transaction volume as we offer
multiple payment solutions and options to our clients. The network exclusivity
provisions of the Durbin Amendment, which require all debit card issuers to have
at least two unaffiliated networks for purposes of processing signature debit
and PIN debit transactions, favorably impacted transaction volumes in our NYCE
PIN debit network in 2012; however, market participants' actions may positively
or negatively impact transaction volumes in the future. In order for our
products and services to comply with these new regulations and enable our
customers to effectively compete in the marketplace, we may need to make
additional capital investments to modify our solutions. Further, the
requirements of the new regulations and the timing of their effective dates
could result in changes in our customers' business practices that may alter
their delivery of services to consumers and the timing of their investment
decisions, which could change the demand for our software and services as well
as alter the type or volume of transactions that we process on behalf of our
customers.
Notwithstanding challenging global economic conditions, our international
business continued to experience growth across most major regions during the
year ended December 31, 2012, including Europe and Brazil. The majority of our
European revenue is generated by clients in Germany, France and the United
Kingdom. Those countries encountering the most significant economic challenges,
including Spain, Italy, Greece, Ireland and Portugal, account for less than 2%
of our international revenue base and less than 0.5% of our consolidated
revenue.
Information Security
Globally, attacks on information technology systems continue to grow in
frequency, complexity and sophistication. Such attacks have become a point of
focus for individuals, businesses and governmental entities. The objectives of
these attacks include, among other things, gaining unauthorized access to
systems to facilitate financial fraud, disrupt operations, cause denial of
service events, corrupt data, and steal non-public, sensitive information. FIS
is not immune to such attacks. As part of our business, we electronically
receive, process, store and transmit a wide range of confidential information,
including but not limited to sensitive information of our customers and personal
consumer data. We also operate payment, cash access and prepaid card systems.
As previously disclosed, in the first quarter of 2011 we experienced a
cyber-incident during which intruders gained unauthorized access to FIS'
network. During the incident, the intruders moved across a number of information
technology environments, viewed and downloaded information, and ultimately
executed approximately $13.0 million in unauthorized ATM transactions through
our Sunrise prepaid card platform, resulting in a loss to FIS. We are aware of
no evidence that any of our clients or their customers suffered any direct
financial loss as a result of the 2011 cyber-incident.
During the 2011 cyber-incident, the attackers also engaged in tactics and
techniques designed to obscure their movements and to prevent a full re-creation
of their activities. To date, we are aware of no evidence of any misuse of any
client
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information gained by the intruders from our information technology systems
environments. This lack of evidence is consistent with the opinion of the
cyber-security consultant we retained in March 2011 and representatives of law
enforcement that the attackers were focused on the theft of money from the
Sunrise prepaid platform.
Since the incident, we have been taking significant steps to improve our
information security, including but not limited to:
• Increasing the monitoring of the servers within our environment to
identify potential unauthorized activity and implementing enhanced fraud
monitoring and network controls;
• Completing the necessary re-certifying of Payment Card Industry (PCI) Data
Security Standard compliance of the Sunrise prepaid platform;
• Implementing enhanced information security processes, including creating a
cross-functional team to implement enhanced transaction monitoring to
detect or prevent fraudulent activity;
• Expanding risk assessment coverage of internet-facing products and services;
• Enhancing our Information Security Strategic Plan with short-term and
long-term measures to improve FIS' information security;
• The hiring of a new Chief Information Security Officer ("CISO"), a Chief
Risk Officer ("CRO") and other senior information security and risk
management personnel;
• Improving our inventory of technology, data and information security
assets worldwide;
• Enhancing layers of network security, including intrusion prevention,
firewall restrictions, and employee access restrictions;
• Enhancing network segmentation to separate production environments; and
• Significantly increasing cyber security, incident response and risk
management staff.
In late February 2012, the federal agencies that regulate financial institutions
and provide regulatory oversight for FIS issued a confidential exam report
related to our information security, risk management and internal audit
functions. We responded to this report and described the actions that we have
taken and will take to improve these functions. The regulatory agencies
distributed a letter to our clients in March 2012 describing the enhancements
they had requested in our information security, risk management and internal
audit functions. FIS believes that it has made substantial progress in
implementing all of these requested enhancements, several of which have been
completed. Throughout 2013, FIS will continue to focus on completing these and
other enhancements identified since March 2012.
In addition, in 2012 we engaged a third-party expert on behalf of our clients to
perform an independent review of our progress in improving our information
security, risk management and internal audit initiatives. The expert's report,
dated November 30, 2012, was posted on our client communications portal. As part
of its review engagement, the expert confirmed the status of our progress, as
stated to our clients and the regulatory agencies, up to that date in enhancing
our Information Security, Risk Management and Internal Audit programs.
After hiring our new Chief Information Security Officer, we commissioned an
additional third party factual investigation to analyze the 2011 cyber-incident,
which is nearing completion. As part of this investigation, the investigators
provided us with additional information indicating that limited data, affecting
a small number of our customers, may have been accessed or, in some cases, was
accessed during the 2011 cyber-incident. We are in the process of communicating
this information with the affected customers and showing the steps that we have
taken to improve our information security systems. We do not expect that this
additional information and the communication thereof to our customers will have
a material adverse effect on the Company.
It is possible that additional information regarding the 2011 cyber-incident
could be discovered and our current understanding of the attackers' focus and
activities during the incident could change, either of which could potentially
have a material adverse effect on the Company.
We are continuing to work closely with and communicate to our clients about the
2011 cyber-incident, including with respect to the additional information
resulting from the ongoing investigation. We are also continuing to focus on
improving our internal information security and risk management functions across
the Company, and assisting our customers in doing the same. We increased the
amounts spent on information security in 2012. Due to the increased frequency
and the evolving nature of cyber-incidents, we expect to continue to implement
enhancements to protect the security of our information technology systems and
data, as well as the information technology data of our clients that we possess.
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Critical Accounting Policies
The accounting policies described below are those we consider critical in
preparing our Consolidated Financial Statements. These policies require
management to make estimates, judgments and assumptions that affect the reported
amounts of assets and liabilities and disclosures with respect to contingent
liabilities and assets at the date of the Consolidated Financial Statements and
the reported amounts of revenues and expenses during the reporting periods.
Actual amounts could differ from those estimates. See Note 2 to the Consolidated
Financial Statements for a more detailed description of the significant
accounting policies that have been followed in preparing our Consolidated
Financial Statements.
Revenue Recognition
The Company generates revenues from the delivery of bank processing, credit and
debit card processing services, other payment processing services, professional
services, software licensing and software related services and products.
Revenues are recognized when evidence of an arrangement exists, delivery has
occurred, fees are fixed or determinable and collection is considered probable.
We are frequently a party to multiple concurrent contracts with the same
customer. These situations require judgment to determine whether the individual
contracts should be aggregated or evaluated separately for purposes of revenue
recognition. In making this determination, we consider the timing of negotiating
and executing the contracts, whether the different elements of the contracts are
interdependent and whether any of the payment terms of the contracts are
interrelated. Due to the large number, broad nature and average size of
individual contracts we are party to, the impact of judgments and assumptions
that we apply in recognizing revenue for any single contract is not likely to
have a material effect on our consolidated operations or financial position.
However, the broader accounting policy assumptions that we apply across similar
arrangements or classes of customers could significantly influence the timing
and amount of revenue recognized in our historical and future results of
operations or financial position. Additional information about our revenue
recognition policies is included in Note 2 to the Consolidated Financial
Statements.
Allowance for Doubtful Accounts
The Company analyzes trade accounts receivable by considering historical bad
debts, customer creditworthiness, current economic trends, changes in customer
payment terms and collection trends when evaluating the adequacy of the
allowance for doubtful accounts. Any change in the assumptions used may result
in an additional allowance for doubtful accounts being recognized in the period
in which the change occurs. The allowance for doubtful accounts was $19.9
million and $33.1 million as of December 31, 2012 and 2011, respectively. The
decrease in 2012 is attributable to resolution of a number of specifically
reserved accounts, as well as enhanced collection management.
Provision for Check Guarantee Losses
In our check guarantee business, if a guaranteed check presented to a merchant
customer is dishonored by the check writer's bank, we reimburse our merchant
customer for the check's face value and pursue collection of the amount from the
delinquent check writer. Loss provisions and anticipated recoveries are
primarily determined by performing a historical analysis of our check loss and
recovery experience and considering other factors that could affect that
experience in the future. Such factors include the general economy, the overall
industry mix of our customer volumes, statistical analysis of check fraud trends
within our customer volumes, and the quality of returned checks. Once these
factors are considered, we establish a rate for check losses that is calculated
by dividing the expected check losses by dollar volume processed and a rate for
anticipated recoveries that is calculated by dividing the anticipated recoveries
by the total amount of related check losses. These rates are then applied
against the dollar volume processed and check losses, respectively, each month
and charged to cost of revenues. The estimated check returns and recovery
amounts are subject to the risk that actual amounts returned and recovered may
be different than our estimates.
Historically, such estimation processes have proved to be materially accurate;
however, our projections of probable check guarantee losses and anticipated
recoveries are inherently uncertain and as a result, we cannot predict with
certainty the amount of such items. Changes in economic conditions, the risk
characteristics and composition of our customers, and other factors could impact
our actual and projected amounts. We recorded check guarantee losses, net of
anticipated recoveries excluding service fees, of $54.7 million, $68.0 million
and $69.4 million, respectively, for the years ended December 31, 2012, 2011 and
2010. The year-over-year reduction is consistent with the ongoing decline in
retail check activity. A ten percent difference in our estimated check guarantee
loss provisions net of estimated recoveries as of December 31, 2012 would have
impacted 2012 net earnings by less than $2.0 million, after-tax.
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Computer Software
Computer software includes the fair value of software acquired in business
combinations, purchased software and capitalized software development costs. As
of December 31, 2012 and 2011, computer software, net of accumulated
amortization, was $847.0 million and $881.5 million, respectively. Purchased
software is recorded at cost and amortized using the straight-line method over
its estimated useful life and software acquired in business combinations is
recorded at its fair value and amortized using straight-line and accelerated
methods over its estimated useful life.
The capitalization of software development costs is governed by FASB ASC
Subtopic 985-20 if the software is to be sold, leased or otherwise marketed, or
by FASB ASC Subtopic 350-40 if the software is for internal use. After the
technological feasibility of the software has been established (for software to
be marketed), or at the beginning of application development (for internal-use
software), software development costs, which include salaries and related
payroll costs and costs of independent contractors incurred during development,
are capitalized. Research and development costs incurred prior to the
establishment of technological feasibility (for software to be marketed), or
prior to application development (for internal-use software), are expensed as
incurred. Software development costs are amortized on a product-by-product basis
commencing on the date of general release of the products (for software to be
marketed) or the date placed in service (for internal-use software). Software
development costs for software to be marketed are amortized using the greater of
(1) the straight-line method over its estimated useful life, which ranges from
three to 10 years, or (2) the ratio of current revenues to total anticipated
revenue over its useful life.
In determining useful lives, management considers historical results and
technological trends that may influence the estimate. Useful lives for all
computer software range from three to 10 years. Amortization expense for
computer software was $195.5 million, $209.4 million and $195.1 million in 2012,
2011 and 2010, respectively. Included in discontinued operations in the
Consolidated Statement of Earnings was amortization expense on computer software
of $3.1 million, $4.5 million and $7.7 million for 2012, 2011 and 2010,
respectively. We also assess the recorded value of computer software for
impairment on a regular basis by comparing the carrying value to the estimated
future cash flows to be generated by the underlying software asset (for software
to be marketed). There are inherent uncertainties in determining the expected
useful life or cash flows to be generated from computer software. While we have
not historically experienced significant changes in these estimates, we could be
subject to such changes in the future.
Goodwill and Other Intangible Assets
We are required to allocate the purchase price of acquired businesses to the
assets acquired and liabilities assumed in the transaction at their estimated
fair values. The estimates used to determine the fair value of long-lived
assets, such as intangible assets, are complex and require a significant amount
of management judgment. We generally engage independent valuation specialists to
assist us in making fair value determinations. We are also required to estimate
the useful lives of intangible assets to determine the amount of
acquisition-related intangible asset amortization expense to record in future
periods. We periodically review the estimated useful lives assigned to our
definite-lived intangible assets to determine whether such estimated useful
lives continue to be appropriate. Additionally, we review our indefinite-lived
intangible assets to determine if there is any change in circumstances that may
indicate the asset's useful life is no longer indefinite.
Goodwill represents the excess of cost over the fair value of identifiable net
assets acquired and liabilities assumed in business combinations. Goodwill and
other intangible assets with indefinite useful lives should not be amortized,
but shall be tested for impairment annually, or more frequently if circumstances
indicate potential impairment. In 2011, the FASB issued Accounting Standards
Update No. 2011-08 ("ASU 2011-08"), Testing Goodwill for Impairment. The revised
standard allows an entity first to assess qualitatively whether it is more
likely than not that a reporting unit's carrying amount exceeds its fair value,
referred to in the guidance as "step zero." If an entity concludes that it is
more likely than not that a reporting unit's fair value is less than its
carrying amount (that is, a likelihood of more than 50 percent), the "step one"
quantitative assessment must be performed for that reporting unit. ASU 2011-08
provided examples of events and circumstances that should be considered in
performing the "step zero" qualitative assessment, including macroeconomic
conditions, industry and market considerations, cost factors, overall financial
performance, events affecting a reporting unit or the entity as a whole and a
sustained decrease in share price.
We assess goodwill for impairment on an annual basis during the fourth quarter
using a September 30th measurement date unless circumstances require a more
frequent measurement. For 2012, primarily for the purpose of refreshing our
valuation assumptions, we elected to proceed directly to the step one
quantitative analysis rather than perform the step zero qualitative assessment.
In applying the quantitative analysis, we determine the fair value of our
reporting units based on a weighted average of multiple valuation techniques,
principally a combination of an income approach and a market approach. The
income approach calculates a value based upon the present value of estimated
future cash flows, while the market
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approach utilizes earnings multiples of similarly situated guideline public
companies. If the fair value of a reporting unit exceeds the carrying value of
the reporting unit's net assets, goodwill is not impaired and further testing is
not required. Based upon the current year results of this test, there are no
indications of impairment for any of our reporting units.
For 2011, we early adopted the provisions of ASU 2011-08, and began our
assessment with the step zero qualitative analysis because there was a
substantial excess of fair value over carrying value for each of our reporting
units in the 2010 step one analysis. In performing the 2011 step zero
qualitative analysis, examining those factors most likely to affect our
valuations, we concluded that it remained more likely than not that the fair
value of each of our reporting units continued to exceed their carrying amounts.
Consequently, we did not perform a step one analysis in 2011.
We also estimate the fair value of acquired intangible assets with indefinite
lives and compare this amount to the underlying carrying value annually. For the
year ended December 31, 2012, we did not record any impairment charges for
acquired intangible assets. During the year ended December 31, 2011, we recorded
an impairment charge of $9.1 million related to the Capco trademark in North
America. During the year ended December 31, 2010, the portion of the unamortized
contract intangible asset recorded at the initiation of the Brazilian Venture
that was attributable to Banco Santander was deemed impaired due to the exit of
Banco Santander. Accordingly, we recorded a pre-tax impairment charge of $140.3
million in the third quarter of 2010. Additionally, in 2010 we recorded a $5.2
million impairment of intangible assets related to the discontinued operations
of Participacoes, as discussed in Notes 6 and 9 to the Consolidated Financial
Statements.
Determining the fair value of a reporting unit or acquired intangible assets
with indefinite lives involves judgment and the use of significant estimates and
assumptions, which include assumptions regarding the revenue growth rates and
operating margins used to calculate estimated future cash flows, risk-adjusted
discount rates and future economic and market conditions and other assumptions.
Accounting for Income Taxes
As part of the process of preparing the Consolidated Financial Statements, we
are required to determine income taxes in each of the jurisdictions in which we
operate. This process involves estimating actual current tax expense together
with assessing temporary differences resulting from differing recognition of
items for income tax and accounting purposes. These differences result in
deferred income tax assets and liabilities, which are included within the
Consolidated Balance Sheets. We must then assess the likelihood that deferred
income tax assets will be recovered from future taxable income and, to the
extent we believe that recovery is not likely, establish a valuation allowance.
To the extent we establish a valuation allowance or increase or decrease this
allowance in a period, we must reflect this increase or decrease as an expense
or benefit within income tax expense in the Consolidated Statements of Earnings.
Determination of the income tax expense requires estimates and can involve
complex issues that may require an extended period to resolve. Further, changes
in the geographic mix of revenues or in the estimated level of annual pre-tax
income can cause the overall effective income tax rate to vary from period to
period. We believe that our tax positions comply with applicable tax law and
that we adequately provide for any known tax contingencies. We believe the
estimates and assumptions used to support our evaluation of tax benefit
realization are reasonable. However, final determination of prior-year tax
liabilities, either by settlement with tax authorities or expiration of statutes
of limitations, could be materially different than estimates reflected in assets
and liabilities and historical income tax provisions. The outcome of these final
determinations could have a material effect on our income tax provision, net
income or cash flows in the period that determination is made.
Related Party Transactions
We are a party to certain historical related party agreements as discussed in
Note 4 to the Consolidated Financial Statements included in Item 8 of Part II of
this Annual Report.
Factors Affecting Comparability
Our Consolidated Financial Statements included in this report that present our
financial condition and operating results reflect the following significant
transactions:
• In December 2010, we acquired Capco and have included the results of
operations and financial position of Capco in the Consolidated Financial
Statements from the date of acquisition.
• In August 2010, we completed a leveraged recapitalization. Through a modified "Dutch Auction" tender offer, we repurchased 86.2 million shares
of our common stock, including 6.4 million shares underlying previously
unexercised
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stock options. The repurchased shares were added to treasury stock. The
recapitalization was funded by incremental debt, as outlined under "Liquidity
and Capital Resources - Financing."
• We have engaged in share repurchase programs throughout all periods
presented. In 2012, we repurchased a total of 14.0 million shares for
$451.4 million; in 2011, we repurchased 15.0 million shares for $399.2
million; and in 2010, in addition to the Dutch Auction, we repurchased 1.4
million shares for $32.2 million.
As a result of the above transactions, the results of operations and earnings
per share in the periods covered by the Consolidated Financial Statements may
not be directly comparable.
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Consolidated Results of Operations
(in millions, except per share amounts)
2012 2011 2010
Processing and services revenues $ 5,807.6 $ 5,625.6 $ 5,145.6
Cost of revenues 3,946.9 3,919.1 3,553.7
Gross profit 1,860.7 1,706.5 1,591.9
Selling, general, and administrative expenses 781.5 647.9 654.0
Impairment charges - 9.1 154.9
Operating income 1,079.2 1,049.5 783.0
Other income (expense):
Interest income 8.6 6.0 6.4
Interest expense (231.3 ) (264.8 ) (179.8 )
Other income (expense), net (25.3 ) (63.7 ) (11.5 )
Total other income (expense) (248.0 ) (322.5 ) (184.9 )
Earnings from continuing operations before income
taxes 831.2 727.0 598.1
Provision for income taxes 270.9 232.4 208.4
Earnings from continuing operations, net of tax 560.3 494.6
389.7
Earnings (loss) from discontinued operations, net
of tax (79.2 ) (13.5 ) (31.8 )
Net earnings 481.1 481.1 357.9
Net (earnings) loss attributable to noncontrolling
interest
(19.9 ) (11.5 ) 46.6
Net earnings attributable to FIS $ 461.2 $ 469.6 $ 404.5
Net earnings per share - basic from continuing
operations attributable to FIS common stockholders $ 1.85 $ 1.61 $ 1.26
Net earnings (loss) per share - basic from
discontinued operations attributable to FIS common
stockholders (0.27 ) (0.04 ) (0.09 )
Net earnings per share - basic attributable to FIS
common stockholders
$ 1.58 $ 1.56 $ 1.17
Weighted average shares outstanding - basic 291.8 300.6 345.1
Net earnings per share - diluted from continuing
operations attributable to FIS common stockholders $ 1.82 $ 1.57 $ 1.24
Net earnings (loss) per share - diluted from
discontinued operations attributable to FIS common
stockholders (0.27 ) (0.04 ) (0.09 )
Net earnings per share - diluted attributable to
FIS common stockholders $ 1.55 $ 1.53 $ 1.15
Weighted average shares outstanding - diluted 297.5 307.0 352.0
Amounts attributable to FIS common stockholders:
Earnings from continuing operations, net of tax $ 540.4 $ 483.1 $ 436.3
Earnings (loss) from discontinued operations, net
of tax (79.2 ) (13.5 ) (31.8 )
Net earnings attributable to FIS $ 461.2 $ 469.6 $ 404.5
Processing and Services Revenues
Processing and services revenues totaled $5,807.6 million, $5,625.6 million and
$5,145.6 million in 2012, 2011 and 2010, respectively. The increase in revenue
during 2012 of $182.0 million, or 3.2%, as compared to 2011, is primarily
attributable to increased processing volumes, transaction growth and demand for
professional and consulting services, plus incremental revenues from 2012
acquisitions of $26.2 million. Total revenue growth in these areas was partially
offset by lower item processing and retail check activity. The 2012 period
included $100.8 million of unfavorable foreign currency impact resulting from a
stronger U.S. Dollar as compared to 2011. The increase in revenue during 2011 of
$480.0 million, or 9.3%, as compared to 2010 was primarily attributable to
incremental revenues of $304.7 million from 2010 acquisitions, increased demand
for professional services and increased processing revenues. Total revenue
growth in these areas in 2011 was tempered by lower item processing and retail
check activity and the change in reporting certain merchant interchange fees
from gross to net revenue recognition, as discussed in greater detail under
Segment Results of Operations. The 2011 period also
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included $47.4 million of favorable foreign currency impact resulting from a
weaker U.S. Dollar as compared with 2010. The 2010 period was favorably impacted
by the recognition of an $83.3 million termination fee in connection with Banco
Santander's exit from the Brazilian Venture.
Cost of Revenues and Gross Profit
Cost of revenues totaled $3,946.9 million, $3,919.1 million and $3,553.7 million
in 2012, 2011 and 2010, respectively, resulting in gross profit of $1,860.7
million, $1,706.5 million and $1,591.9 million in 2012, 2011 and 2010,
respectively. Gross profit as a percentage of revenues ("gross margin") was
32.0%, 30.3% and 30.9% in 2012, 2011 and 2010, respectively. Cost of revenues
were comparable during 2012 and 2011. The increase in gross margin during 2012
as compared to 2011 is due to increased operating leverage and cost management
initiatives. The increase in cost of revenues of $365.4 million in the 2011
period as compared to the 2010 period was directly attributable to the revenue
variances addressed above. The termination fee received in connection with Banco
Santander's exit from the Brazilian Venture favorably augmented gross margins
for 2010, contributing to a decrease in gross margin of 170 basis points during
2011 by comparison. Further, while Capco provided revenue growth in 2011, the
lower margin contribution unfavorably impacted gross margin as compared to
2010.
Selling, General and Administrative Expenses
Selling, general and administrative expenses totaled $781.5 million, $647.9
million and $654.0 million for 2012, 2011 and 2010, respectively. The 2012
increase of $133.6 million as compared to 2011 was primarily due to increased
compensation costs and costs to enhance administrative support of operational
functions, including information security and risk and compliance. The
compensation costs included $43.2 million in payments and accelerated vesting of
certain stock option and restricted stock grants triggered by changes in
responsibility or separation from the Company of certain executives. In
addition, the 2011 period benefited from a $22.3 million reduction in a
contingent consideration liability related to the Capco acquisition as addressed
in Note 5 to the Consolidated Financial Statements. The decrease of $6.1 million
in 2011 as compared to 2010 results primarily from higher expenses included in
the 2010 period in connection with our leveraged recapitalization, coupled with
the 2011 reduction in the Capco contingent consideration liability. These
impacts were partially offset by incremental operating costs in 2011 resulting
from 2010 acquisitions. Other factors impacting the comparison include a
$10.1 million recovery in September 2010 of legal costs previously incurred as
the result of a favorable court ruling and the $13.0 million loss related to
unauthorized activities on the Sunrise prepaid card platform recorded in 2011
(see Note 19 to the Consolidated Financial Statements).
Impairment Charges
Impairment charges totaled $9.1 million and $154.9 million for 2011 and 2010,
respectively. No impairment charges were taken in 2012. The 2011 charges relate
to a reduction in the carrying value of the Capco trademark in North America.
The 2010 charges relate to impairments resulting from the exit of Banco
Santander from the Brazilian Venture, including $140.3 million representing the
portion of the unamortized contract intangible asset recorded at the initiation
of the Brazilian Venture that was attributable to Banco Santander, and the net
unamortized balance of $14.6 million for certain capitalized software
development costs incurred exclusively for use in processing Banco Santander
card activity (see Note 6 to the Consolidated Financial Statements).
Operating Income
Operating income totaled $1,079.2 million, $1,049.5 million and $783.0 million
for 2012, 2011 and 2010, respectively. Operating income as a percentage of
revenue ("operating margin") was 18.6%, 18.7% and 15.2% for 2012, 2011 and 2010,
respectively. The annual increases in operating income and changes in operating
margin were driven by the revenue and cost variances addressed above.
Total Other Income (Expense)
Total other income (expense) was $(248.0) million, $(322.5) million and $(184.9)
million for 2012, 2011 and 2010, respectively. The primary component of total
other income (expense) is interest expense. The decrease of $33.5 million in
interest expense in 2012 as compared to 2011 resulted from lower borrowing rates
combined with a reduction in total debt outstanding. The increase of $85.0
million in interest expense in 2011 as compared to 2010 resulted from higher
overall debt levels as a result of our recapitalization in mid-2010 and higher
interest rates.
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Apart from interest expense, 2012 includes $18.4 million in costs related to the
write-off of certain previously capitalized debt issuance costs resulting from
the early pay down of certain debt and related refinancing activities. In
comparison, 2011 included $38.8 million of debt refinancing expenses, including
$24.7 million of previously capitalized debt issuance costs, and a $34.0 million
other-than-temporary impairment of available-for-sale securities acquired in
conjunction with the acquisition of Metavante. The 2010 period included $13.7
million of debt extinguishment expenses, the write-off of certain previously
capitalized debt issuance costs and fees and other expenses relating to our
leveraged recapitalization. The 2010 period also included the forgiveness of
$19.4 million of notes payable representing additional consideration which was
to be paid to the banks in the Brazilian Venture upon migration of their card
portfolios and an extinguishment gain of $5.7 million from the restructuring of
the remaining Banco Bradesco notes in conjunction with other revisions to the
Brazilian Venture agreements (see Note 6 to the Consolidated Financial
Statements).
Provision for Income Taxes
Income tax expense from continuing operations totaled $270.9 million, $232.4
million and $208.4 million for 2012, 2011 and 2010, respectively. This resulted
in an effective tax rate on continuing operations of 32.6%, 32.0% and 34.8% for
2012, 2011 and 2010, respectively. The tax rates were comparable during the 2012
and 2011 periods. The net decrease in the overall effective tax rate for the
2011 period was primarily related to a larger proportion of foreign-source
pre-tax income versus domestic income during the 2011 period and state income
tax planning. Additionally, the 2011 period included a one-time benefit for the
favorable resolution of tax contingencies in international jurisdictions,
implementation of federal tax planning strategies and a non-recurring benefit
related to our United Kingdom operations.
Earnings (Loss) from Discontinued Operations
During 2012, 2011 and 2010, certain operations are classified as discontinued.
Reporting for discontinued operations classifies revenues and expenses as one
line item, net of tax, in the Consolidated Statements of Earnings. On June 25,
2012, we entered into a definitive agreement to sell our Healthcare Benefit
Solutions Business ("Healthcare Business") because its operations did not align
with our strategic plans. The all-cash transaction closed on August 15, 2012 and
we received cash proceeds of $332.2 million. We recorded a pre-tax gain of $22.0
million and tax expense on the sale of $78.3 million, which resulted from the
allocation of goodwill with minimal tax basis. In addition, during the third
quarter of 2010, we determined that we would pursue strategic alternatives for
Fidelity National Participacoes Ltda. ("Participacoes"). In January 2010, we
closed on the sale of ClearPar. The table below outlines the components of
discontinued operations for 2012, 2011 and 2010, net of tax (in millions). See
also Note 3 to the Consolidated Financial Statements.
2012 2011 2010
Healthcare Benefit Solutions Business $ (47.8 ) $ 10.7 $ 11.3
Impairment charges- Participacoes
- - (16.6 )
Participacoes operations (31.4 ) (24.2 ) (25.2 )
Other - - (1.3 )
Total discontinued operations $ (79.2 ) $ (13.5 ) $ (31.8 )
The Healthcare Business had revenues of $80.5 million, $120.1 million and $123.9
million for 2012, 2011 and 2010, respectively. In connection with our 2012 sale
of the Healthcare Benefit Solutions Business, the Company entered into an
agreement to provide certain commercial and transitional services to the buyer
and expects to continue to generate insignificant cash flows for the provision
of these services. The following table illustrates the results of operations for
the years ended December 31, 2012, 2011 and 2010 for the Healthcare Benefit
Solutions Business (in millions).
Years ended December 31,
2012 2011 2010
Pre-tax income from operations $ 13.8 $ 17.3
$ 18.2
Pre-tax gain on sale 22.0 - -
Earnings before tax 35.8 17.3 18.2
Tax expense 83.6 6.6 6.9
Healthcare Benefit Solutions
Business included in discontinued
operations $ (47.8 ) $ 10.7 $ 11.3
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Participacoes had no revenue in 2012 and revenues of $11.7 million and $61.5
million for 2011 and 2010, respectively. Participacoes had operating expenses of
$47.5 million, $48.3 million and $125.0 million for 2012, 2011 and 2010,
respectively. Participacoes' processing volume was transitioned to other vendors
or back to its customers during the second quarter of 2011. As a result of the
dismissal of employees related to the shut-down activities completed in 2011,
the 2012 and 2011 periods included charges of $39.1 million and $34.6 million,
respectively, to increase our accrual for potential labor claims and related
administrative costs. The shut-down activities involved the transfer and
termination of approximately 2,600 employees. As of December 31, 2012, there are
approximately 1,550 active labor claims. Former employees have up to two years
from the date of termination to file labor claims, or April 2013. Consequently,
we have continued exposure to such claims and adverse claim development, which
were not transferred with other assets and liabilities in the disposal. Any
changes in the estimated liability related to these labor claims will also be
recorded as discontinued operations.
Net (Earnings) Loss Attributable to Noncontrolling Interest
Net (earnings) loss attributable to noncontrolling interest totaled $(19.9)
million, $(11.5) million and $46.6 million for 2012, 2011 and 2010,
respectively. The 2010 year included after tax charges totaling $50.1 million
relating to the minority partner's proportionate share of the write-off of
capitalized software development costs and of the impairment to the unamortized
contract intangible asset resulting from the exit of Banco Santander from the
Brazilian Venture. See Note 6 to the Consolidated Financial Statements.
Earnings from Continuing Operations, Net of Tax, Attributable to FIS Common
Stockholders
Earnings from continuing operations, net of tax, attributable to FIS common
stockholders totaled $540.4 million, $483.1 million and $436.3 million for 2012,
2011 and 2010, respectively, or $1.82, $1.57 and $1.24 per diluted share,
respectively, due to the factors described above coupled with the impact of our
share repurchase initiatives.
Segment Results of Operations
Financial Solutions Group
2012 2011 2010
(In millions)
Processing and services revenues $ 2,246.4 $ 2,076.8 $ 1,890.8
Operating income $ 716.2 $ 680.3 $ 673.4
Operating margin 31.9 % 32.8 % 35.6 %
Revenues for FSG totaled $2,246.4 million, $2,076.8 million and $1,890.8 million
for 2012, 2011 and 2010, respectively. The overall segment increase of $169.6
million, or 8.2%, for 2012 as compared to 2011 was driven by growth in
professional services, back office processing and outsourced IT revenues,
increased processing revenues and incremental revenues from 2012 acquisitions of
$26.2 million. Increased processing revenue is driven by core processing account
volume growth, growth and adoption of eBanking and mobile banking products, as
well as risk, fraud and compliance transactions. This processing revenue growth
was generated from existing customer growth and newly converted competitive
wins. Services revenue continues to grow in core banking systems, eBanking,
mobile banking and outsourced services. The overall segment increase of $186.0
million or 9.8% for 2011 as compared to 2010 was driven by incremental Capco
revenues, as well as increased processing revenues and growth in professional
services.
Operating income for FSG totaled $716.2 million, $680.3 million and $673.4
million for 2012, 2011 and 2010, respectively. Operating margin was
approximately 31.9%, 32.8% and 35.6% for 2012, 2011 and 2010, respectively. The
increase in operating income during 2012 as compared to 2011 primarily resulted
from the revenue variances discussed above. The decrease in operating margin
during 2012 as compared to 2011 reflects a decrease in higher margin license
revenues in the current year and increased spending related to information
security and infrastructure initiatives. The increase in operating income during
2011 as compared to 2010 primarily resulted from increased processing revenues
and growth in professional services, partially offset by $12.4 million in
merger, integration and severance costs. The decrease in operating margin during
2011 as compared to 2010 was due to a higher proportion of professional services
revenue during 2011, including Capco consulting services revenue, which has a
lower margin than other revenue sources, particularly in relation to the higher
license revenues in 2010.
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Payment Solutions Group
2012 2011 2010
(In millions)
Processing and services revenues $ 2,380.6 $ 2,372.1 $ 2,354.2
Operating income $ 881.2 $ 822.7 $ 803.5
Operating margin 37.0 % 34.7 % 34.1 %
Revenues for PSG totaled $2,380.6 million, $2,372.1 million and $2,354.2 million
for 2012, 2011 and 2010, respectively. The 2012 period included growth in
electronic payment services, offset by lower item processing, retail check
activity and loyalty program revenue. Revenue growth during 2012 was also
negatively impacted by the June 2012 deconversion of a large debit card
processing client. The 2011 period included growth in print and mail and card
personalization and electronic payment services, offset by lower item processing
and retail check activity. Additionally, consolidation of our merchant
processing platforms resulted in the utilization of the net method to account
for certain merchant interchange fees, causing a $34.4 million unfavorable
revenue variance during 2011 as compared to 2010.
Operating income for PSG totaled $881.2 million, $822.7 million and $803.5
million for 2012, 2011 and 2010, respectively. Operating margin was
approximately 37.0%, 34.7% and 34.1% for 2012, 2011 and 2010, respectively. The
increases in operating income and operating margin during 2012 primarily reflect
operating leverage related to the revenue growth in electronic payment services
and the impact of disciplined cost management. The 2011 period included $13.6
million of integration and severance costs. Integration costs for 2010 were
included in the Corporate and Other Segment.
International Solutions Group
2012 2011 2010
(In millions)
Processing and services revenues $ 1,180.5 $ 1,177.6 $ 917.0
Operating income $ 202.2 $ 187.6 $ 71.1
Operating margin 17.1 % 15.9 % 7.8 %
Revenues for ISG totaled $1,180.5 million, $1,177.6 million and $917.0 million
for 2012, 2011 and 2010, respectively. The 2012 period included $99.7 million of
unfavorable foreign currency impact resulting from a stronger U.S. Dollar during
the 2012 period. Excluding the unfavorable foreign currency impact, revenues for
2012 increased primarily from higher card transaction volumes in Brazil, growth
within our European consulting businesses and our expanded presence across Asia
including growth in the India ATM management business. Brazilian card volume
growth translates into additional processing revenues and incremental call
center and back-office revenues. The overall segment increase of $260.6 million
for 2011 as compared to 2010 resulted primarily from incremental revenues from
Capco's European business and increased credit card volumes in Brazil, growth in
the India ATM management business, growth in Australian core banking revenues
and license revenues from strategic customer relationships in EMEA. The 2011
period also included $47.4 million of favorable foreign currency impact
resulting from a weaker U.S. Dollar during the 2011 period.
Operating income for ISG totaled $202.2 million, $187.6 million and $71.1
million for 2012, 2011 and 2010, respectively. Operating margin was 17.1%, 15.9%
and 7.8% for 2012, 2011 and 2010, respectively. The increase in operating income
in 2012, as compared to 2011, primarily resulted from the revenue growth noted
above, combined with increased scale and improved operating efficiencies across
a number of geographies but primarily in Brazil. Increased operating leverage
and other operating efficiencies generated improved margins in 2012. The 2010
period included pre-tax impairment charges of $154.9 million attributable to
Banco Santander's exit from the Brazilian Venture. Excluding the impact of Banco
Santander's exit, operating income and margin would have been $142.7 million or
17.1% for 2010. The increases in operating income in 2011 as compared to 2010
primarily resulted from the revenue growth noted above. While Capco has provided
revenue growth, the lower margin contribution from Capco has unfavorably
impacted ISG's overall margin.
Corporate and Other
The Corporate and Other segment results consist of selling, general and
administrative expenses and depreciation and intangible asset amortization not
otherwise allocated to the reportable segments. Corporate and Other expenses
were $720.4 million, $641.1 million and $765.0 million in 2012, 2011 and 2010,
respectively. The overall Corporate and Other increase of $79.3 million for 2012
as compared to 2011 was primarily due to increased compensation costs, including
stock compensation,
36--------------------------------------------------------------------------------
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and benefits, and costs to enhance administrative support of operational
functions, including information security and risk and compliance. The
compensation charges include $43.2 million related to payments and the
accelerated vesting of certain stock option and restricted stock grants
triggered by changes in responsibility or separation from the Company of certain
executives. The overall Corporate and Other decrease of $123.9 million for 2011
as compared to 2010 was primarily due to restructuring and integration costs
included in the 2010 period associated with merger and acquisition activity and
expenses in connection with the leveraged recapitalization, partially offset by
the recovery in 2010 of legal costs previously incurred as the result of a
favorable court ruling. The 2011 period included the $13.0 million loss related
to unauthorized activities on the Sunrise prepaid card platform noted under
Selling, General and Administrative Expenses in the Consolidated Results of
Operations section above, $9.5 million in merger, integration and service costs,
and a $13.2 million net benefit from adjustments from the Capco acquisition. The
latter was comprised of a reduction in the contingent consideration liability of
$22.3 million, partially offset by a $9.1 million impairment of the North
American trademark.
Liquidity and Capital Resources
Cash Requirements
Our ongoing cash requirements include operating expenses, income taxes,
mandatory debt service payments, capital expenditures, stockholder dividends,
working capital and timing differences in settlement-related assets and
liabilities, and may include discretionary debt service, share repurchases, and
business acquisitions. Also, our cash requirements include payments for labor
claims related to FIS' former item processing and remittance operations in
Brazil (see Note 3 in the Notes to Consolidated Financial Statements). Our
principal sources of funds are cash generated by operations and borrowings.
As of December 31, 2012, we had cash and cash equivalents of $517.6 million and
debt of $4,385.5 million, including the current portion. Of the $517.6 million
cash and cash equivalents, approximately $282.1 million is held by our foreign
entities. The majority of our domestic cash and cash equivalents are not
available for general corporate purposes due to the timing of settlement
activity. We expect that cash and cash equivalents plus cash flows from
operations over the next twelve months will be sufficient to fund our operating
cash requirements and pay principal and interest on our outstanding debt.
We expect to continue to pay quarterly dividends, which were increased from
$0.05 to $0.20 per share per quarter in 2012. On February 12, 2013, the Board of
Directors approved an additional increase to $0.22 per share per quarter
beginning with the first quarter of 2013. However, the amount, declaration and
payment of future dividends is at the discretion of the Board of Directors and
depends on, among other things, our investment opportunities, results of
operations, financial condition, cash requirements, future prospects, and other
factors that may be considered relevant by our Board of Directors, including
legal and contractual restrictions. Additionally, the payment of cash dividends
may be limited by covenants in certain debt agreements. A regular quarterly
dividend of $0.22 per common share is payable on March 29, 2013 to shareholders
of record as of the close of business on March 15, 2013.
Cash Flows from Operations
Cash flows from operations were $1,046.7 million, $1,171.5 million and $1,071.3
million in 2012, 2011 and 2010 respectively. Cash flows from operations
decreased $124.8 million in 2012 and increased $100.2 million in 2011. The 2012
decrease in cash flows from operations is primarily due to the payment of $105.4
million of income taxes related to the sale of our Healthcare Business and
fluctuations in the timing of merchant and card transaction settlement activity
offset by other changes in working capital. The increase in 2011 was primarily
due to higher earnings from operations, the timing of merchant and card
transaction settlement activity and other changes in working capital.
Capital Expenditures
Our principal capital expenditures are for computer software (purchased and
internally developed) and additions to property and equipment. We invested
approximately $296.1 million, $300.3 million and $314.0 million in capital
expenditures during 2012, 2011 and 2010, respectively. We expect to invest
approximately 5-6% of 2013 revenue in capital expenditures.
Financing
For information regarding the Company's long-term debt and financing activity,
see Note 13 in the Notes to Consolidated Financial Statements.
37--------------------------------------------------------------------------------
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Contractual Obligations
FIS' long-term contractual obligations generally include its long-term debt,
interest on long-term debt, lease payments on certain of its property and
equipment and payments for data processing and maintenance. For more descriptive
information regarding the Company's long-term debt, see Note 13 in the Notes to
Consolidated Financial Statements. The following table summarizes FIS'
significant contractual obligations and commitments as of December 31, 2012 (in
millions):
Less than 1-3 3-5 More than
Total 1 Year Years Years 5 Years
Long-term debt $ 4,385.5 $ 153.9 $ 757.1 $ 2,274.5 $ 1,200.0
Interest(1) 1,137.6 200.4 372.9 288.8 275.5
Operating leases 226.6 55.0 96.2 46.4 29.0
Data processing and maintenance 246.7 131.7 78.9 28.4 7.7
Other contractual obligations (2) 100.7 18.8 52.0 10.6 19.3
Total $ 6,097.1 $ 559.8 $ 1,357.1 $ 2,648.7 $ 1,531.5
(1) These calculations assume that: (a) applicable margins remain constant;
(b) all variable rate debt is priced at the one-month LIBOR rate in effect
as of December 31, 2012; (c) no new hedging transactions are effected; (d)
only mandatory debt repayments are made; and (e) no refinancing occurs at
debt maturity.
(2) Amount includes the payment for labor claims related to FIS' former item
processing and remittance operations in Brazil (see Note 3 to the
Consolidated Financial Statements) and amounts due to the Brazilian
venture partner.
FIS believes that its existing cash balances, cash flows from operations and
borrowing programs will provide adequate sources of liquidity and capital
resources to meet FIS' expected short-term liquidity needs and its long-term
needs for the operations of its business, expected capital spending for the next
12 months and the foreseeable future and the satisfaction of these obligations
and commitments.
Off-Balance Sheet Arrangements
FIS does not have any off-balance sheet arrangements.
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