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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
________________________________________________________
Form 10-K
________________________________________________________
x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
For the fiscal year ended December 31, 2012 | ||
or | ||
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
For the transition period from to | ||
Commission File No. 001-16427
________________________________________________________
Fidelity National Information Services, Inc.
(Exact name of registrant as specified in its charter)
Georgia (State or other jurisdiction of incorporation or organization) | 37-1490331 (I.R.S. Employer Identification No.) | |
601 Riverside Avenue Jacksonville, Florida (Address of principal executive offices) | 32204 (Zip Code) | |
(904) 438-6000
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class: | Name of Each Exchange on Which Registered: | |
Common Stock, par value $0.01 per share | New York Stock Exchange | |
Securities registered pursuant to Section 12(g) of the Act: None
(Title of Class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes x No o
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No x
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer x | Accelerated filer o | Non-accelerated filer o | Smaller reporting company o |
(Do not check if a smaller reporting company) | |||
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) Yes o No x
As of June 30, 2012, the last business day of the registrant’s most recently completed second fiscal quarter, the aggregate market value of the registrant’s common stock held by nonaffiliates was $8,569,526,804 based on the closing sale price of $34.08 on that date as reported by the New York Stock Exchange. For the purposes of the foregoing sentence only, all directors and executive officers of the registrant were assumed to be affiliates. The number of shares outstanding of the registrant’s common stock, $0.01 par value per share, was 294,489,305 million as of January 31, 2013.
The information in Part III hereof is incorporated herein by reference to the registrant’s Proxy Statement on Schedule 14A for the fiscal year ended December 31, 2012, to be filed within 120 days after the close of the fiscal year that is the subject of this Report.
FIDELITY NATIONAL INFORMATION SERVICES, INC.
2012 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
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EX-101 INSTANCE DOCUMENT | ||
EX-101 SCHEMA DOCUMENT | ||
EX-101 CALCULATION LINKBASE DOCUMENT | ||
EX-101 DEFINITION LINKBASE DOCUMENT | ||
EX-101 LABELS LINKBASE DOCUMENT | ||
EX-101 PRESENTATION LINKBASE DOCUMENT | ||
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Unless stated otherwise or the context otherwise requires, all references to “FIS,” “we,” the “Company” or the “registrant” are to Fidelity National Information Services, Inc., a Georgia corporation formerly known as Certegy Inc.
PART I
Item 1. Business.
Overview
FIS is a leading global provider of 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 and is a member of the Fortune 500 U.S. and of Standard and Poor’s (S&P) 500® Index.
FIS is incorporated under the laws of the State of Georgia as Fidelity National Information Services, Inc. and our stock is traded on the New York Stock Exchange under the trading symbol "FIS".
Our growth has been driven organically as well as through acquisitions, which have contributed critical applications that are complementary to or enhance existing offerings, including core banking solutions, outsourcing solutions for community banks, credit unions, and other financial institutions, item processing services, card issuer services, risk management solutions, electronic funds transfer ("EFT") services, and prepaid/gift card processing, including solutions for domestic companies, global organizations and for those domiciled outside of North America. These strategic acquisitions have enabled us to quickly broaden our available solution offerings, scale our operations, expand our customer base and strengthen our competitive position.
Financial Information About Operating Segments and Geographic Areas
We report the results of our operations in four reporting segments: 1) Financial Solutions Group (“FSG”); 2) Payment Solutions Group (“PSG”); 3) International Solutions Group (“ISG”); and 4) Corporate and Other.
Competitive Strengths
We believe that our competitive strengths include the following:
• | Global Reach and Distribution — FIS' worldwide presence, multidimensional solution offerings, customer breadth and employee depth enable us to leverage our client relationships and global scale to drive revenue growth and operating efficiency. We are a leader in the markets we serve with a vast and diverse customer base, supported by a large, knowledgeable talent pool of employees around the world. |
• | Market Coverage — FIS has comprehensive solutions serving a broad array of customers, including domestic and international financial institutions of all sizes, as well as non-financial institutions. |
• | Extensive Domain Expertise and Portfolio Depth — FIS has a significant number and wide range of high quality software applications and services that have been developed over many years with substantial input from our customers to provide them with comprehensive business solutions. In addition, FIS is able to use the modular nature of our software applications and our ability to integrate many of our services with the services of others to provide customized solutions that respond to individualized customer needs. FIS also offers a wide range of flexible service arrangements for the deployment and support of our software, from traditional license and maintenance fee approaches to managed processing arrangements, either at the customer’s site or at an FIS location. We understand the needs of our customers and have developed innovative services that can give them a competitive advantage and reduce their operating costs. |
• | Excellent Relationship with Customers — A significant percentage of FIS’ business with our customers relates to core processing applications and services, and the nature of this relationship allows us to develop close partnerships with these customers. As the breadth of FIS’ service offerings expands, we have found that our access to key customer personnel is increasing, presenting greater opportunities for cross-selling. |
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Strategy
Our mission is to achieve sustainable revenue and earnings growth through providing superior solutions to our customers. Our strategy to achieve this has been and will continue to be built on the following pillars:
• | Expand Client Relationships — The overall market we serve continues to gravitate beyond single-product purchases to multi-solution partnerships. As the market dynamics shift, we expect our clients to rely more on our multidimensional service offerings. Our leveraged solutions and processing expertise can drive meaningful value and cost savings to our clients through more efficient operating processes, improved service quality and speed for our clients' customers. |
• | Buy, Build or Partner to Add Solutions to Cross-Sell — We continue to invest in growth through internal product development, as well as through product-focused or market-centric acquisitions that complement and extend our existing capabilities and provide us with additional solutions to cross-sell. We also partner from time to time with other entities to provide comprehensive offerings to our customers. By investing in solution innovation and integration, we continue to expand our value proposition to clients. |
• | Support Our Clients Through Market Transformation — The changing market dynamics are transforming the way our clients operate, which is driving incremental demand for our leveraged solutions, consulting expertise, and services around intellectual property. Our depth of services capabilities enables us to become involved earlier in the planning and design process to assist our clients as they manage through these changes. |
• | Continually Improve to Drive Margin Expansion — We strive to optimize our performance through investments in infrastructure enhancements and other measures that are designed to drive organic revenue growth and margin expansion. |
• | Build Global Diversification — We continue to deploy resources in emerging global markets where we expect to achieve meaningful scale. |
Revenues by Segment
The table below summarizes the revenues by our reporting segments (in millions):
2012 | 2011 | 2010 | |||||||||
FSG | $ | 2,246.4 | $ | 2,076.8 | $ | 1,890.8 | |||||
PSG | 2,380.6 | 2,372.1 | 2,354.2 | ||||||||
ISG | 1,180.5 | 1,177.6 | 917.0 | ||||||||
Corporate & Other | 0.1 | (0.9 | ) | (16.4 | ) | ||||||
Total Consolidated Revenues | $ | 5,807.6 | $ | 5,625.6 | $ | 5,145.6 | |||||
Financial Solutions Group
The focus of FSG is to provide the most comprehensive software and services for the core processing, customer channel, treasury services, cash management, wealth management and capital market operations of our financial institution customers in North America. We service the core and related ancillary processing needs of North American banks, credit unions, automotive financial companies, commercial lenders, and independent community and savings institutions. FIS offers a broad selection of in-house and outsourced solutions to banking customers that span the range of asset sizes. FSG customers are typically committed under multi-year contracts that provide a stable, recurring revenue base and opportunities for cross-selling additional financial and payments offerings.
We employ several business models to provide our solutions to our customers. We typically deliver the highest value to our customers when we combine our software applications and deliver them in one of several types of outsourcing arrangements, such as an application service provider, facilities management processing or an application management arrangement. We are also able to deliver individual applications through a software licensing arrangement. Based upon our expertise gained through the foregoing arrangements, some clients also retain us to manage their IT operations without using any of our proprietary software.
Our solutions in this segment include:
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• | Core Processing and Ancillary Applications. Our core processing software applications are designed to run banking processes for our financial institution clients, including deposit and lending systems, customer management, and other central management systems. Our diverse selection of market-focused core systems enables FIS to effectively compete in a wide range of markets. We also offer a number of services that are ancillary to the primary applications listed above, including branch automation, back office support systems and compliance support. In addition, our wealth management services address the specific needs of the affluent markets as well as commercial clients. We also offer an application suite that assists automotive finance institutions in evaluating loan applications and credit risk and managing their loan and lease portfolios. |
• | Internet and eBanking Channel Solutions. Our comprehensive suite of retail delivery applications enables financial institutions to integrate and streamline customer-facing operations and back-office processes, thereby improving customer interaction across all channels (e.g., branch offices, Internet, ATM, call centers). The FIS focus on consumer access has driven significant market innovation in this area, with multi-channel and multi-host solutions and a strategy that provides tight integration of services and a seamless customer experience. Our Consumer Electronic Banking and Business Internet Banking both provide an extensive set of cash management capabilities, enabling customers to manage banking and payments through the Internet, mobile devices, accounting software and telephone. Corporate Electronic Banking solutions provide commercial treasury capabilities including cash management services and multi-bank collection and disbursement services that address the specialized needs of corporate customers. FIS systems provide full accounting and reconciliation for such transactions, serving as the system of record. |
• | Fraud, Risk Management and Compliance Solutions. Our decision solutions offer a full spectrum of options that cover the account lifecycle from helping to identify qualified account applicants to managing mature customer accounts and fraud. Our applications include know-your-customer, new account decisioning, new account opening, account and transaction management, fraud management and collections. Our risk management services utilize our proprietary risk management models and data sources to assist in detecting fraud and assessing the risk of opening a new account or accepting a check at either the point-of-sale, a physical branch location, or through the Internet. Our systems utilize a combination of advanced authentication procedures, predictive analytics, artificial intelligence modeling and proprietary and shared databases to assess and detect fraud risk for deposit transactions for financial institutions. |
• | Syndicated Lending. Our syndicated loan applications are designed to support wholesale and commercial banking requirements necessary for all aspects of syndicated commercial loan origination, trade and servicing. |
• | Global Commercial Services. Our global commercial services include solutions, both onshore and offshore, designed to meet the technology challenges facing principally U.S. based clients, large or small, including financial institutions and non-financial institutions. Our technology solutions range in scope from consulting engagements to application development projects and from operations support for a single application to full management of information technology infrastructures. We also provide outsourcing teams to manage costs, improve operational efficiency, transform processes and deliver world-class customer service. There is an increased trend toward outsourcing in our customer base, thus expansion of these services represents one of FIS’ growth drivers. |
• | Strategic Consulting Services. We acquired The Capital Markets Company NV ("Capco") in December 2010. Capco provides integrated consulting, technology and complex, large-scale transformation services. Capco specializes in banking, capital markets, wealth and investment management, finance, risk and compliance, and technology. Capco's North American operations are included in FSG. |
Payment Solutions Group
PSG provides a comprehensive set of software and services for the EFT, card processing, item processing, bill payment, and government payments processing needs of our customers in North America. PSG is focused on servicing the payment and EFT needs of North American headquartered banks and credit unions, commercial lenders, independent community and savings institutions and government institutions. PSG customers typically commit to multi-year contracts that provide recurring revenues based on underlying payment transaction volumes.
Our solutions in this segment include:
• | Electronic Funds Transfer. Our electronic funds transfer and debit card processing businesses offer settlement and card management solutions for financial institution card issuers. We provide traditional ATM- and PIN-based debit network access and emerging real-time payment alternatives through NYCE. NYCE connects millions of cards and point-of-sale locations nationwide, providing consumers with secure, real-time access to their money. Also through NYCE, clients such as financial institutions, retailers and independent ATM operators can capitalize on the efficiency, |
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consumer convenience and security of electronic real-time payments, real-time account-to-account transfers, and strategic alliances such as surcharge-free ATM network arrangements. We are also a leading provider of prepaid card services, which include gift cards and reloadable cards, with end-to-end solutions for development, processing and administration of stored-value programs.
• | Item Processing and Output Services. Our item processing services furnish financial institutions with the equipment needed to capture data from checks, transaction tickets and other items; image and sort items; process exceptions through keying; and perform balancing, archiving and the production of statements. Our item processing services are utilized by more than 1,500 financial institutions and are performed at one of our eight item processing centers located throughout the U.S. or on-site at customer locations. Our extensive solutions include distributed (i.e., non-centralized) data capture, check and remittance processing, fraud detection, and document and report management. Customers encompass banks and corporations of all sizes, from de novo banks to the largest financial institutions and corporations. As part of our image solutions services, our Endpoint Exchange Network enables U.S. financial institutions to clear their check-based transactions by allowing for the exchange of check images between member institutions. We offer a number of output services that are ancillary to the primary solutions we provide, including print and mail capabilities and card personalization fulfillment services. Helping clients manage their documents, our CSF® Designer document composition software is used by many clients in various industries to furnish printed or electronically produced invoices and statements for customized customer communication. Our print and mail services offer complete computer output solutions for the creation, management and delivery of print and fulfillment needs. We provide our card personalization fulfillment services for branded credit cards and branded and non-branded debit and prepaid cards. |
• | Credit Card Solutions. More than 4,900 financial institutions utilize a combination of our technology and/or services to issue VISA®, MasterCard® or American Express® branded credit and debit cards or other electronic payment cards for use by both consumer and business accounts. Our services range from card production and activation to an extensive range of fraud management services to value-added loyalty programs designed to increase card usage and fee-based revenues. The majority of our programs are full service, including most of the operations and support necessary for an issuer to operate a credit card program. We do not make credit decisions for our card issuing customers. In addition, our merchant card processing service provides everything a financial institution needs to manage its merchant card activities, including point-of-sale equipment, transaction authorization, draft capture, settlement, charge-back processing and reporting. |
• | Government Payments Solutions. We provide comprehensive, customized electronic service applications for government agencies, including Internal Revenue Service (IRS) payment services. We also facilitate the collection of state income taxes, real estate taxes, utility bills, vehicle registration fees, driver’s license renewal fees, parking tickets, traffic citations, tuition payments, court fees and fines, hunting and fishing license fees, as well as various business licenses. |
• | ePayment Solutions. We provide reliable and scalable bill publishing and bill consolidation technology for our customers, generating millions of monthly bills and servicing both billers and financial institution customers. Online bill payment functionality includes credit and debit card-based expedited payments. Our end-to-end presentment and payment solution provides an all-in-one solution to meet billers’ needs for the distribution and collection of bills and other customer documents. FIS also provides Automated Clearing House ("ACH") processing. |
• | Check Authorization. Our check authorization business provides check risk management and related services to businesses accepting or cashing checks. Our services assess the likelihood (and often provide a guarantee) that a check will clear. Our check authorization system utilizes artificial intelligence modeling and other state-of-the-art technology to deliver accuracy, convenience and simplicity to retailers. |
International Solutions Group
ISG provides local services to our customers in more than 100 countries around the world. The services delivered by FIS in these locations provide many of the same financial and payments solutions we offer in North America. We provide core banking applications, channel solutions, card and merchant services, item processing and check risk management solutions to financial institutions, card issuers and retailers.
Our international operations leverage existing applications and provide services for the specific business needs of our customers in targeted international markets. Services are delivered from 28 operations centers around the world. Our payment solutions services include fully outsourced card-issuer services and customer support, payment processing and switching services, prepaid and debit card processing, item processing, software licensing and maintenance, outsourced ATM management and retail point-of-sale check warranty services. Our financial solutions services include fully outsourced core
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bank processing arrangements, application management, software licensing and maintenance, facilities management and consulting services, including Capco's international operations.
ISG represented approximately 20% of total 2012 revenues, with potential for both growth in existing customer accounts and new account penetration. Management believes the greatest potential for growth is in the Western European, Latin American and Asian markets.
Corporate and Other Segment
The Corporate and Other segment consists of the corporate overhead costs that are not allocated to operating segments. These include costs related to human resources, legal, risk, information security, finance and accounting and domestic sales and marketing, amortization of acquisition-related intangibles and other costs that are not considered when management evaluates operating segment performance.
Sales and Marketing
We have an integrated team of experienced sales personnel with expertise in particular services and the needs of particular types of customers, e.g., financial institutions, other nonbanking customers, and international institutions. This organizational structure enables us to effectively bring relevant skills and knowledge to potential customers and to identify additional solutions for our existing customers, leveraging opportunities to cross-sell and up-sell. We target the majority of our potential customers via direct and/or indirect field sales, as well as inbound and outbound lead generation and telesales efforts.
Our global marketing strategy is to develop and lead the execution of the various business units’ strategic plans in support of their revenue and profitability goals. Key components include thought leadership, consistent message development, internal and external communications, client conference content management, Web content creation and management, trade shows, demand generation campaign involvement and collateral development and management.
Patents, Copyrights, Trademarks and Other Intellectual Property
The Company owns intellectual property, including trademarks, trade names, copyrights and patents, that is important to its future success. We rely on a combination of contractual restrictions, internal security practices, patents and applicable law to establish and protect our software, technology and expertise worldwide. We rely on trademark law to protect our rights in those brands. While we intend to continue taking appropriate measures to protect our intellectual property rights, these legal protections and arrangements afford only limited protection, and there is no assurance that our competitors will not independently develop or license products, services, or capabilities that are substantially equivalent or superior to ours. In general, we own the proprietary rights necessary for the conduct of our business, although we do license certain items from third parties under arms-length agreements for varying terms.
Competition
Our primary competitors include internal technology departments within financial institutions and retailers, data processing or software development departments of large companies or large computer manufacturers, third-party payment processors, independent computer services firms, companies that develop and deploy software applications, companies that provide customized development, implementation and support services and companies that market software for the financial services industry. Some of these competitors possess substantially greater financial, sales and marketing resources than we do. Competitive factors impacting the success of our services include the quality of the technology-based application or service, application features and functions, ease of delivery and integration, ability of the provider to maintain, enhance, and support the applications or services, and price. We believe that we compete favorably in each of these categories. In addition, we believe that our financial institution industry expertise, combined with our ability to offer multiple applications, services and integrated solutions to individual customers, enhances our competitiveness against companies with more limited offerings. Specific competitors for both financial and payment solutions include Fiserv, Inc. and Jack Henry and Associates, Inc. In the core processing market, we also compete with International Business Machines Corporation (IBM), Accenture Ltd., Alliance Data Systems Corporation, DST Systems, Harland Financial Solutions, Inc., SEI Investments Company, ACI Worldwide, SunGard Data Systems, Inc. and in certain non-U.S. markets, Alnova Technologies Corporation, Oracle Financial Services Software Limited (formerly known as I-Flex Solutions Limited), Misys plc, Infosys Technologies Limited and Temenos Group AG. Our competitors in the card services market include MasterCard Incorporated, Visa Inc., and third-party credit and debit card processors, such as First Data Corporation, Total System Services, Inc., HP Enterprise Services and Payment Systems for Credit Unions (PSCU). Competitors in the check risk management services market include First Data Corporation’s TeleCheck Services division, Heartland Payments Systems, Inc., Total Systems Services, Inc. and Global Payments, Inc.
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Research and Development
Our research and development activities have related primarily to the design and development of processing systems and related software applications and risk management platforms. We expect to continue our practice of investing an appropriate level of resources to maintain, enhance and extend the functionality of our proprietary systems and existing software applications, to develop new and innovative software applications and systems in response to the needs of our customers, and to enhance the capabilities surrounding our outsourcing infrastructure. In addition, we intend to offer services that are compatible with new and emerging delivery channels.
As part of our research and development process, we evaluate current and emerging technology for compatibility with our existing and future software platforms. To this end, we engage with various hardware and software vendors in evaluation of various infrastructure components. Where appropriate, we use third-party technology components in the development of our software applications and service offerings. Third-party software may be used for highly specialized business functions, which we may not be able to develop internally within time and budget constraints. Additionally, third-party software may be used for commodity-type functions within a technology platform environment. In the case of nearly all of our third-party software, enterprise license agreements exist for the third-party component and either alternative suppliers exist or transfer rights exist to ensure the continuity of supply. As a result, we are not materially dependent upon any third-party technology components. We work with our customers to determine the appropriate timing and approach to introducing technology or infrastructure changes to our applications and services. In the years ended December 31, 2012, 2011 and 2010, approximately 2% to 3% of revenues were invested in research and development efforts (excluding amounts capitalized).
Government Regulation
Our services are subject to a broad range of complex federal, state, and foreign regulation, including federal truth-in-lending and truth-in-savings rules, Regulation AA (Unfair or Deceptive Acts or Practices), privacy laws, usury laws, the Equal Credit Opportunity Act, the Electronic Funds Transfer Act, the Fair Credit Reporting Act, the Fair Debt Collection Practices Act, the Bank Secrecy Act, the USA Patriot Act, the Internal Revenue Code, the Employee Retirement Income Security Act, the Health Insurance Portability and Accountability Act, the Community Reinvestment Act and the Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Dodd-Frank Act"). The compliance of our services with these and other applicable laws and regulations depends on a variety of factors, including the manner in which our clients use them. Our clients are contractually responsible for determining what is required of them under applicable laws and regulations so that we can assist them in their compliance efforts. The failure of our services to comply with applicable laws and regulations could result in restrictions on our ability to provide them, as well as the imposition of civil fines and/or criminal penalties. The principal areas of regulation impacting our business are:
• | Privacy. Our financial institution clients are required to comply with privacy regulations imposed under the Gramm-Leach-Bliley Act. These regulations place restrictions on the use of non-public personal information. All financial institutions must disclose detailed privacy policies to their customers and offer them the opportunity to direct the financial institution not to share information with third parties. The regulations, however, permit financial institutions to share information with non-affiliated parties who perform services for the financial institutions. As a provider of services to financial institutions, we are required to comply with the privacy regulations and are bound by the same limitations on disclosure of the information received from our customers as apply to the financial institutions themselves. |
• | Money Transfer. Elements of our cash access and money transmission businesses are registered as a Money Services Business and are subject to the USA Patriot Act and reporting requirements of the Bank Secrecy Act and U.S. Treasury Regulations. These businesses are also subject to various state, local and tribal licensing requirements. The Financial Crimes Enforcement Network, state attorneys general, and other agencies have enforcement responsibility over laws relating to money laundering, currency transmission, and licensing. In addition, most states have enacted statutes that require entities engaged in money transmission and the sale of stored value cards to register as a money transmitter with that jurisdiction's banking department. |
• | Consumer Reporting and Protection. Our retail check authorization services (Certegy Check Services) and account opening services (ChexSystems) maintain databases of consumer information and, as a consequence, are subject to the Federal Fair Credit Reporting Act and similar state laws. Among other things, the Federal Fair Credit Reporting Act imposes requirements on us concerning data accuracy, and provides that consumers have the right to know the contents of their files, to dispute their accuracy, and to require verification or removal of disputed information. The Federal Trade Commission, as well as state attorneys general and other agencies, have enforcement responsibility over |
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the collection laws, as well as the various credit reporting laws. In furtherance of our objectives of data accuracy, fair treatment of consumers, protection of consumers’ personal information, and compliance with these laws, we strive to maintain a high level of security for our computer systems in which consumer data resides, and we maintain consumer relations call centers to facilitate efficient handling of consumer requests for information and handling disputes.
The Housing Assistance Tax Act of 2008 requires, among other provisions, information reporting obligations on payment settlement entities for calendar years beginning after December 31, 2010. This law requires every merchant acquiring entity and third-party settlement organization to file information returns for the gross amount of reportable payment transactions for the calendar year and the reportable payment transactions for each month of the calendar year. The reportable payment transactions are any transactions in which a payment card is accepted as payment and any third-party payment network. This law resulted in significant additional Form 1099 reporting requirements for FIS.
The Dodd-Frank Act was enacted and signed into law on July 21, 2010. Among other provisions, this legislation created the Consumer Financial Protection Bureau (the "Bureau"), whose sole focus is to develop, implement and, with respect to financial institutions with more than $10 billion in assets, enforce consumer protection rules promulgated by the Bureau, including enhanced oversight of non-financial institutions providing financial services. For financial institutions with less than $10 billion in assets, enforcement of the rules will be carried out by such institution's primary federal regulator.
The Dodd-Frank Act also amended the Electronic Fund Transfer Act (''EFTA'') by adding a new section 920 regarding limitations on certain interchange transaction fees and modification of certain payment card network rules. This provision requires that the Federal Reserve Board enact regulations governing interchange fees and network fees arising from electronic debit card and reloadable general-use gift card transactions. Specifically, the amount of interchange fees that apply to such transactions on cards issued by financial institutions with more than $10 billion in assets must be “reasonable and proportional” to the costs incurred by a financial institution in connection with such transactions. Pursuant to this provision, the Federal Reserve Board's final regulations (announced on June 29, 2011 and effective on October 1, 2011) establish a maximum permissible interchange fee that a covered issuer may receive for an electronic debit transaction, in the amount of $0.21 per transaction and five basis points multiplied by the value of the transaction, plus a possible $0.01 fraud prevention adjustment. Issuers that, together with their affiliates, have assets of less than $10 billion are exempt from these debit card interchange fee restrictions.
The maximum interchange fee established by the Federal Reserve Board for covered transactions is a significant reduction from the pre-October 1, 2011 per transaction average rate. For FIS, interchange fees are primarily pass-through fees to non-regulated issuers and this change did not have a direct impact on our earnings. However, it is uncertain what the indirect financial impact will be on FIS, as our clients are faced with significant revenue reductions from the interchange rate changes. Moreover, since not all regulations implementing the Dodd-Frank Act have been finalized, we are uncertain as to what extent the legislation may affect our business in the future. The remaining proposed regulations do not appear to be intended to directly affect interchange fees applicable to credit card transactions, but they do prohibit networks from “inhibiting” retailers from setting minimum purchase amounts for use of credit cards, as long as the minimum purchase amount is not greater than $10, so long as the value does not differentiate between card issuers or payment card networks.
The Dodd-Frank Act also prohibits payment card issuers and payment networks from restricting the number of networks over which electronic debit transactions may be processed to less than two unaffiliated networks. The effective date for this network exclusivity prohibition was April 1, 2012 with respect to issuers and October 1, 2011 with respect to networks. Issuers of certain health-related and other benefit cards and general-use prepaid cards have a delayed effective date of April 1, 2013, or later in certain circumstances.
Issuers and networks are also prohibited from inhibiting a merchant's ability to direct the routing of the electronic debit transaction over any network that the issuer has enabled to process them. The merchant routing provisions became effective on October 1, 2011.
• | Debt Collection. Our collection services are subject to the Federal Fair Debt Collection Practices Act and various state collection laws and licensing requirements. The Federal Trade Commission, as well as state attorneys general and other agencies, have enforcement responsibility over the collection laws, as well as the various credit reporting laws. |
• | Oversight by Banking Regulators. As a provider of electronic data processing and back-office services to financial institutions, FIS is subject to regulatory oversight and examination by the Federal Financial Institutions Examination Council ("FFIEC"), an interagency body of the Federal Deposit Insurance Corporation, the Office of the Comptroller |
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of the Currency, the Board of Governors of the Federal Reserve System, the National Credit Union Administration and various state regulatory authorities as part of the Multi-Region Data Processing Servicer Program ("MDPS"). The MDPS program includes technology providers that provide mission critical applications for a large number of financial institutions that are regulated by multiple regulatory agencies. Periodic information technology examination assessments are performed using FFIEC Interagency guidelines to identify potential risks that could adversely affect serviced financial institutions, determine compliance with applicable laws and regulations that affect the services provided to financial institutions and to ensure the services we provide to financial institutions do not create systemic risk to the banking system or impact the safe and sound operation of the financial institutions we process. In addition, independent auditors annually review several of our operations to provide reports on internal controls for our customers’ auditors and regulators. We are also subject to review under state and foreign laws and rules that regulate many of the same activities that are described above, including electronic data processing and back-office services for financial institutions and the use of consumer information.
The foregoing list of laws and regulations to which our Company is subject is not exhaustive, and the regulatory framework governing our operations changes continuously. Enactment of new laws and regulations may increasingly affect the operations of our business, directly and indirectly, which could result in substantial regulatory compliance costs, litigation expense, adverse publicity, and/or loss of revenue.
Disclosure Pursuant to Section 219 of the Iran Threat Reduction & Syria Human Rights Act
Under the Iran Threat Reduction and Syrian Human Rights Act of 2012 (the “Act”), which added Section 13(r) of the Securities Exchange Act of 1934, we are required to include certain disclosures in our periodic reports if we or any of our “affiliates” (as defined in Rule 12b-2 under the Exchange Act) knowingly engage in certain specified activities during the period covered by the report. Neither we nor any of our controlled affiliates or subsidiaries engaged in any of the specified activities during 2012. However, because the SEC defines the term “affiliate” broadly, it includes any entity controlled by us as well as any person or entity that controlled us or is under common control with us (“control” is also construed broadly by the SEC). During 2012, Warburg Pincus LLC (“Warburg”) was potentially an upstream affiliate of ours as so defined, as a result of the share ownership of WPM, LP (which owned 14.2% of our outstanding stock as of February 27, 2012, but only owns 6.5% as of the date of this report) and its right to designate a single director to our eight person board of directors. Warburg has informed us that Bausch & Lomb Incorporated (“Bausch & Lomb”), a company controlled by Warburg, has provided it with the following information relevant to Section 13(r). We have no involvement in or connection with the activities of Bausch & Lomb or any of its subsidiaries and receive no revenue from them, and have not independently verified or participated in the disclosure provided by Warburg pursuant to the Act. To comply with the Act, Warburg provided us with the following disclosure:
“Bausch & Lomb, an eye health company, makes sales of human healthcare products to benefit patients in Iran under licenses issued by the U.S. Department of the Treasury's Office of Foreign Assets Control (“OFAC”). In 2012, Bausch & Lomb was granted licenses by OFAC, extending to its foreign affiliates doing business in Iran. Before the U.S. Government extended OFAC sanctions to entities controlled by U.S. persons in October 2012, it was permissible under U.S. law for non-U.S. affiliates to engage in sales to Iranian customers under limited circumstances. In accordance with these requirements, during the first three quarters of 2012, certain of Bausch & Lomb's non‑U.S. affiliates engaged in sales to Iran from its Surgical - Consumables business, which includes certain intraocular lenses and other products used to help people retain or regain sight. Its non-U.S. affiliate, Technolas Perfect Vision GmbH (“TPV”), which sells ophthalmic surgery systems and related products used in connection with refractive and cataract surgery, also engaged in sales to Iran. These sales were all conducted through a distributor, which also engaged in certain registration and licensing activities with the Iranian government involving Bausch & Lomb's products. The Iranian distributor is not listed on any U.S. sanctions lists and is not a government-owned entity. However, the downstream customers of this distributor included public hospitals, which may be owned or controlled directly or indirectly by the Iranian government. The entire gross revenues attributable to Bausch & Lomb's Surgical - Consumables business not conducted pursuant to an OFAC license in Iran during 2012 were US$5,058,000 and the gross profits were US$2,690,000. The entire gross revenues attributable to TPV's sales to Iran during 2012 not under OFAC license were € 1,738,900 and the gross profits were € 958,624. Bausch & Lomb does not have sufficient information to specify what proportion of these sales may relate to Iranian government end customers of its distributor. The purpose of Bausch & Lomb's Iran-related activities is to provide access to important and sight-saving products to surgeons and patients in Iran, and to improve the eye healthcare of the Iranian people. For this reason, Bausch & Lomb and its affiliates plan to continue their existing activities and operations in Iran; however, as noted above, all of this business (including business conducted by non-U.S. companies) is conducted pursuant to licenses issued by OFAC.”
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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. For more information on Information Security, see Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations.
Employees
As of December 31, 2012, we had more than 35,000 employees, including approximately 21,000 employees principally employed outside of the U.S. None of our U.S. workforce currently is unionized. Approximately 11,100 of our employees, primarily in Brazil and Germany, are represented by labor unions. We consider our relations with employees to be good.
Available Information
Our Internet website address is www.fisglobal.com. We make our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, and Current Reports on Form 8-K, and any amendments to those reports, available, free of charge, on that website as soon as reasonably practicable after we file or furnish them to the Securities and Exchange Commission. Our Corporate Governance Policy and Code of Business Conduct and Ethics are also available on our website and are available in print, free of charge, to any shareholder who mails a request to the Corporate Secretary, Fidelity National Information Services, Inc., 601 Riverside Avenue, Jacksonville, FL 32204 USA. Other corporate governance-related documents can be found at our website as well. However, the information found on our website is not a part of this or any other report.
Item 1A. | Risk Factors. |
In addition to the normal risks of business, we are subject to significant risks and uncertainties, including those listed below and others described elsewhere in this Annual Report on Form 10-K. Any of the risks described herein could result in a significant adverse effect on our results of operations and financial condition.
Risks Related to Our Business and Operations
Consolidations and business failures in the banking and financial services industry could adversely affect our business by eliminating some of our existing and potential customers and making us more dependent on a more limited number of customers.
There has been and continues to be substantial consolidation activity in the banking and financial services industry. In addition, many financial institutions that experienced negative operating results, including some of our customers, have failed. These consolidations and failures reduce our number of potential customers and may reduce our number of existing customers, which could adversely affect our revenues, even if the events do not reduce the aggregate activities of the consolidated entities. Further, if our customers fail and/or merge with or are acquired by other entities that are not our customers, or that use fewer of our services, they may discontinue or reduce use of our services. It is also possible that larger financial institutions resulting from consolidations 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. Any of these developments could have an adverse effect on our business, results of operations and financial condition.
If we fail to adapt our services to changes in technology or in the marketplace, or if our ongoing efforts to upgrade our technology are not successful, we could lose customers and have difficulty attracting new customers for our services.
The markets for our services are characterized by constant technological changes, frequent introductions of new services and evolving industry standards. Our future success will be significantly affected by our ability to enhance our current services, and develop and introduce new services that address the increasingly sophisticated needs of our customers and their clients. These initiatives carry the risks associated with any new service development effort, including cost overruns, delays in delivery, and performance issues. There can be no assurance that we will be successful in developing, marketing and selling new services that meet these changing demands, that we will not experience difficulties that could delay or prevent the successful development, introduction, and marketing of these services, or that our new services and their enhancements will adequately
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meet the demands of the marketplace and achieve market acceptance. Any of these developments could have an adverse impact on our future revenues and/or business prospects.
We operate in a competitive business environment, and if we are unable to compete effectively our results of operations and financial condition may be adversely affected.
The market for our services is intensely competitive. Our competitors vary in size and in the scope and breadth of the services they offer. Some of our competitors have substantial resources. We face direct competition from third parties, and since many of our larger potential customers have historically developed their key applications in-house and therefore view their system requirements from a make-versus-buy perspective, we often compete against our potential customers’ in-house capacities. In addition, we expect that the markets in which we compete will continue to attract new competitors and new technologies. There can be no assurance that we will be able to compete successfully against current or future competitors or that the competitive pressures we face in the markets in which we operate will not materially adversely affect our business, financial condition, and results of operations. See "Item I. Business. Competition."
Global economic, political and other conditions, including business cycles and consumer confidence, may adversely affect our customers or trends in consumer spending, which may adversely impact the demand for our services and our revenue and profitability.
A significant portion of our revenue is derived from transaction processing fees. The global transaction processing industries depend heavily upon the overall level of consumer, business and government spending. Any change in economic factors, including a sustained deterioration in general economic conditions or consumer confidence, particularly in the United States, or increases in interest rates in key countries in which we operate may adversely affect consumer spending, including related consumer debt, reduce check writing and change credit and debit card usage, and as a result, adversely affect our financial performance by reducing the number or average purchase amount of transactions that we service.
Constraints within global financial markets or international regulatory requirements could constrain our financial institution customers' ability to purchase our services, impacting our future growth and profitability.
A significant number of our customers and potential customers may hold sovereign debt or be subject to emerging international requirements such as Basel III, which could require changes in their capitalization and hence the amount of their working capital available to purchase our services. These organizations could have their capital constrained if the value of sovereign debt of nations such as Greece, Spain, Italy, Ireland or Portugal continues to decline, if additional countries default on their debt, or if emerging regulatory requirements such as Basel III require institutions to alter their capital structures. These potential constraints could alter the ability of customers or potential customers to purchase our services and thus could have a significant impact on our future growth and profitability.
Potential customers may be reluctant to switch to a new vendor, which may adversely affect our growth.
For banks and other potential customers of our financial information software and services, switching from one vendor of bank core processing or related software and services (or from an internally-developed system) to a new vendor is a significant undertaking. Many potential customers perceive potential disadvantages such as loss of accustomed functionality, increased costs (including conversion costs) and business disruption. As a result, potential customers may resist change. We seek to overcome this resistance through value enhancing strategies such as a defined conversion process, system integration including bundling additional services and making ongoing investments to enhance the functionality of our software. However, there can be no assurance that our strategies for overcoming potential customers’ reluctance to change vendors will be successful, and this resistance may adversely affect our growth.
The sales and implementation cycles for many of our software and service offerings can be lengthy and require significant investment from both our customers and FIS. If we fail to close sales or if a customer chooses not to complete an installation after expending significant time and resources to do so, our business, financial condition, and results of operations may be adversely affected.
The sales and associated deployment of many of our software or service offerings often involve significant capital commitments by our customers and/or FIS. Potential customers generally commit significant resources to an evaluation of available software and services and require us to expend substantial time, effort, and money educating them prior to sales. Further, as part of the sale or deployment of our software and services, customers may also require FIS to perform significant related services to complete a proof of concept or custom development to meet their needs. All of the aforementioned activities may expend significant funds and management resources and, ultimately, the customer may determine not to close the sale or
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complete the implementation. If we are unsuccessful in closing sales or if the customer decides not to complete an implementation after we expend significant funds and management resources or we experience delays, it could have an adverse effect on our business, financial condition, and results of operations.
Failure to obtain new clients or renew client contracts on favorable terms could result in a lower number of clients and adversely affect results of operations and financial condition.
We may face pricing pressure in obtaining and retaining our larger clients. Larger clients may be able to seek price reductions from us when they renew a contract, when a contract is extended, or when the client's business has significant volume changes. Further, our smaller and mid-size clients may exert pricing pressure due to pricing competition or other economic needs or pressures being experienced by the customer. On some occasions, this pricing pressure results in lower revenue from a client than we had anticipated based on our previous agreement with that client. This reduction in revenue could result in an adverse effect on our business, operating results and financial condition.
Further, failure to renew client contracts on favorable terms could have an adverse effect on our business. Our contracts with customers generally run for several years and provide for early termination fees. Terms are generally renegotiated prior to the end of a contract's term. If we are not successful in achieving a high rate of contract renewals on favorable terms, our results of operations and financial condition could be adversely affected.
We may experience defects, development delays, installation difficulties, system failure, or other service disruptions with respect to our technology solutions, which would harm our business and reputation and expose us to potential liability.
Many of our services are based on sophisticated software and computing systems, and we may encounter delays when developing new technology solutions and services. Further, the technology solutions underlying our services have occasionally contained and may in the future contain undetected errors or defects when first introduced or when new versions are released. In addition, we may experience difficulties in installing or integrating our technologies on platforms used by our customers or our customers may cancel a project after we have expended significant effort and resources to complete an installation. Finally, our systems and operations could be exposed to damage or interruption from fire, natural disaster, power loss, telecommunications failure, unauthorized entry and computer viruses. Defects in our technology solutions, errors or delays in the processing of electronic transactions, or other difficulties could result in: (i) interruption of business operations; (ii) delay in market acceptance; (iii) additional development and remediation costs; (iv) diversion of technical and other resources; (v) loss of customers; (vi) negative publicity; or (vii) exposure to liability claims. Any one or more of the foregoing could have an adverse effect on our business, financial condition and results of operations. Although we attempt to limit our potential liability through controls, including system redundancies, security controls, application development and testing controls and disclaimers and limitation-of-liability provisions in our license and customer agreements, we cannot be certain that these measures will always be successful in preventing disruption or limiting our liability.
The Dodd-Frank Act may result in business changes for our customers that could have an adverse effect on our financial condition, revenues, results of operations, or prospects for future growth and overall business.
Our customers, and as a result our associated software and services, are required to comply with numerous regulations. 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 Consumer Financial Protection Bureau and will require this and other federal agencies to implement many new regulations, which have the potential to increase the amount and types of regulation on areas of our business that were not previously regulated. The Durbin Amendment established interchange fee ceilings and allowed merchants to direct routing of transactions, both effective October 1, 2011, and established provisions that require all issuers to utilize at least two unaffiliated networks for processing, effective April 1, 2012. These changes may alter the nature or type of card programs offered by our customers, which could have an ongoing impact on our future growth or revenue for debit cards or other card programs. Further, these changes could impact the volume or dollar amount of transactions that are routed through our network, which could alter the number of transactions that we process and impact our future processing fee revenue.
Several new regulations and rules will be written and implemented as directed by the aforementioned legislation and these new rules and regulations will require our customers or potential customers to comply with new requirements and could require FIS to directly comply with new regulations. See "Item I. Business. Government Regulation" for more information regarding certain of these new requirements. These new requirements could result in the need for FIS to make capital investments to modify our products and services to facilitate our customers and potential customers' compliance, as well as to deploy additional processes or reporting to comply with new regulations. Further, requirements of the new regulations could result in changes in our customers' business practices and those of other marketplace participants that may alter the delivery of services to consumers, which could impact the demand for our software and services as well as alter the type or volume of transactions
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that we process on behalf of our customers. As a result, the new legislation could have an adverse impact on our financial condition, revenues, results of operations, prospects for future growth and overall business.
Many of our customers are subject to a regulatory environment and to industry standards that may change in a manner that reduces the number of transactions in which our customers engage and, therefore, reduces our revenues.
Our customers are subject to a number of government regulations and industry standards with which our services must comply. Our customers must ensure that our services and related products work within the extensive and evolving regulatory and industry requirements applicable to them. Federal, state, foreign or industry authorities could adopt laws, rules or regulations affecting our customers' businesses that could lead to increased operating costs and could reduce the convenience and functionality of our products and services, possibly resulting in reduced market acceptance. In addition, action by regulatory authorities relating to credit availability, data usage, privacy, or other related regulatory developments could have an adverse effect on our customers and, therefore, could have a material adverse effect on our business, financial condition, and results of operations.
Regulations enacted by the Consumer Financial Protection Bureau may require FIS to enact new business practices which may require capital investment which could impact our future operating results.
The Consumer Financial Protection Bureau regulates financial and non-financial institutions and providers to those organizations. The Bureau is establishing its regulatory agenda and will likely pass additional rules for regulating non-financial institution providers to ensure adequate protection of consumer privacy and to ensure consumers are not impacted by deceptive business practices. The impact of these rules may require FIS or its subsidiaries to be subject to additional regulation and adopt additional business practices that could require additional capital expenditures or impact our operating results.
Our revenues from the sale of services to members of VISA, MasterCard, American Express, Discover and other similar organizations are dependent upon our continued certification and sponsorship, and the loss or suspension of certification or sponsorship could adversely affect our business.
In order to provide our card processing services, we must be certified (including applicable sponsorship) by VISA, MasterCard, American Express, Discover and other similar organizations. These certifications are dependent upon our continued adherence to the standards of the issuing bodies and sponsoring member banks. The member financial institutions, some of which are our competitors, set the standards with which we must comply. If we fail to comply with these standards we could be fined, our certifications could be suspended, or our registration could be terminated. The suspension or termination of our certifications, or any changes in the rules and regulations governing VISA, MasterCard, American Express, Discover, or other similar organizations could prevent our registration or otherwise limit our ability to provide services, which could result in a reduction in revenue or increased costs of operation, which in turn could have a material adverse effect on our business.
Changes in card association and debit network fees or products could increase costs or otherwise limit our operations.
From time to time, card associations and debit networks increase the interchange fees that they charge. It is possible that competitive pressures will result in our absorption of a portion of such increases in the future, which would increase our operating costs, reduce our profit margin and adversely affect our business, financial condition, and results of operation. Furthermore, the rules and regulations of the various card associations and networks prescribe certain capital requirements. Any increase in the capital level required would further limit our use of capital for other purposes.
Interchange fees and related practices have been receiving significant legal and regulatory scrutiny worldwide. The resulting regulatory changes that could occur from proposed regulations could alter the fees charged by card associations and debit networks worldwide. The impact from the regulations could change from time to time and the resulting changes in fees could impact the card issuance or services offered by our customers, which could have an adverse impact on our business or financial condition due to reductions or changes in types of transactions processed on behalf of our customers. See "Item I. Business. Government Regulation" for more information.
If we fail to comply with applicable regulations or to meet regulatory expectations, our business, results of operations or financial condition could be adversely impacted.
The majority of our data processing services for financial institutions are not directly subject to federal or state regulations specifically applicable to financial institutions such as banks, thrifts and credit unions. However, as a provider of services to these financial institutions, our data processing operations are examined on a regular basis by various federal and state regulatory authorities. If we fail to comply with any applicable regulations or guidelines for operations of a data services
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provider, we could be subject to regulatory actions or regulatory rating changes, may not meet contractual obligations, or suffer harm to our client relationships or reputation. Failure to meet the aforementioned requirements or to adapt to new requirements at the Federal, state or international level could inhibit our ability to retain existing customers or obtain new customers, which could have an adverse impact on our business, results of operations and financial condition.
In addition to our data processing services described above, we also have business operations that store, process or transmit consumer information or have direct relationships with consumers that are obligated to comply with regulations, including, but not limited to, the Federal Fair Credit Reporting Act, the Federal Fair Debt Collection Practices Act and applicable privacy requirements. Further, our international businesses must comply with applicable laws such as the U.S. Foreign Corrupt Practices Act. Failure to maintain compliance with or adapt to changes in any of the aforementioned requirements could result in fines, penalties or regulatory actions that could have an adverse impact on our business, results of operations and financial condition.
Security breaches, our own failure to comply with laws and regulations or industry security requirements imposed on providers of services to financial institutions and card processing services could harm our business by disrupting our delivery of services and damaging our reputation and could result in a breach of one or more client contracts.
As part of our business, we electronically receive, process, store and transmit sensitive business information of our customers. In addition, we collect personal consumer data, such as names and addresses, social security numbers, driver's license numbers, cardholder data and payment history records to support our customers' transaction processing, as well as part of our check authorization and collection businesses. The uninterrupted operation of our information systems and the confidentiality of the customer/consumer information that resides on such systems are critical to our successful operation. If we fail to maintain an adequate security infrastructure, adapt to emerging security threats, or implement sufficient security standards and technology to protect against security breaches, the confidentiality of the information we secure could be compromised. Unauthorized access to our computer systems or databases could result in the theft or publication of confidential information, the deletion or modification of records or could otherwise cause interruptions in our operations. These risks are increased when we transmit information over the Internet and due to increasing security risks posed by organized crime and politically motivated hackers.
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. Nonetheless, it was 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. If additional information regarding the incident is discovered, our current understanding of the attackers' activities during the incident could change, and the result could potentially have a material adverse effect on us. New cyber-incidents or additional cyber-incidents as a result of the previous unauthorized access incident could have a material adverse impact on us. In addition, while there is no pending litigation against us related to this cyber-incident, litigation may result.
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. This letter acknowledged our commitment to address these requests expeditiously. In the fourth quarter of 2012, the regulatory agencies completed the fieldwork for their regularly scheduled examination of FIS. A final report is pending at the time of this filing.
After hiring our new Chief Information Security Officer, we commissioned an additional third-party factual investigation to analyze the 2011 cyber-incident comprehensively and objectively. This investigation is not yet complete; however, additional information has been provided to us by the investigators indicating that limited data, affecting a small number of our customers, may have been accessed or was accessed during the 2011 cyber-incident. We are in the process of communicating this information with the affected customers. We do not expect that this additional information and the communication thereof to our customers will have a material adverse effect on the Company, although we cannot predict this with certainty. It is possible that additional information regarding the 2011 cyber-incident could be discovered and our current understanding of the
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attackers' focus and activities during the incident could change, either of which could potentially have a material adverse effect on the Company.
Further, although we have implemented significant enhancements in our security systems and environments since the attack, and are continuing to make improvements, we are unable to predict with certainty what, if any, further communications our regulators will have with our regulated financial institution clients or will require us to have with our clients. We are also unable to predict the effect that any future FIS communications to our clients may have on our business. Any future actions from our regulators or clients could have a material adverse impact on our business.
Further, as a provider of services to financial institutions and card processing services, we are bound by the same limitations on disclosure of the information we receive from our customers as apply to the customers themselves. If we fail to comply with these regulations and industry security requirements, we could be exposed to suits for breach of contract, governmental proceedings or the imposition of fines, or prohibitions on card processing services. In addition, if more restrictive privacy laws, rules or industry security requirements are adopted in the future on the federal or state level or by a specific industry body, they could have an adverse impact on us through increased costs or restrictions on business processes. Any inability to prevent security or privacy breaches, or the perception that such breaches may occur, could cause our existing customers to lose confidence in our systems and terminate their agreements with us, inhibit our ability to attract new customers and/or result in increasing regulation or other adverse consequences from the government agencies that regulate our business.
Misappropriation of our intellectual property and proprietary rights could impair our competitive position.
Our ability to compete depends upon proprietary systems and technology. Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy aspects of our services or to obtain and use information that we regard as proprietary. Policing unauthorized use of our proprietary rights is difficult. We cannot make any assurances that the steps we have taken will prevent misappropriation of technology or that the agreements entered into for that purpose will be enforceable. Effective trademark, service mark, copyright, and trade secret protection may not be available in every country in which our applications and services are made available online. Misappropriation of our intellectual property or potential litigation concerning such matters could have an adverse effect on our results of operations or financial condition.
If our applications or services are found to infringe the proprietary rights of others, we may be required to change our business practices and may also become subject to significant costs and monetary penalties.
As our information technology applications and services develop, we are increasingly subject to infringement claims. Any claims, whether with or without merit, could: (i) be expensive and time-consuming to defend; (ii) result in an injunction or other equitable relief which could cause us to cease making, licensing or using applications that incorporate the challenged intellectual property; (iii) require us to redesign our applications, if feasible; (iv) divert management’s attention and resources; and (v) require us to enter into royalty or licensing agreements in order to obtain the right to use necessary technologies or pay damages resulting from any infringing use.
We face liability to our merchant customers if checks that we have guaranteed are dishonored by the check writer’s bank.
If a check that we have guaranteed is dishonored by the check writer’s bank, we must reimburse our merchant customer for the check’s face value and pursue collection of the amount from the check writer. In some cases, we recognize a liability to our merchant customers for estimated check returns and a receivable for amounts we estimate we will recover from the check writers, based on historical experience and other relevant factors. The estimated check returns and recovery amounts are subject to the risk that actual amounts returned may exceed our estimates and actual amounts recovered by us may be less than our estimates.
Lack of system integrity, fraudulent payments, credit quality related to funds settlement or the availability of clearing services could result in a financial loss.
We settle funds on behalf of financial institutions, other businesses and consumers and receive funds from clients, card issuers, payment networks and consumers on a daily basis for a variety of transaction types. Transactions facilitated by us include debit card, credit card, electronic bill payment transactions, ACH payments and check clearing that supports consumers, financial institutions and other businesses. These payment activities rely upon the technology infrastructure that facilitates the verification of activity with counterparties, the facilitation of the payment as well as the detection or prevention of fraudulent payments. If the continuity of operations, integrity of processing, or ability to detect or prevent fraudulent payments were compromised, this could result in a financial loss to us. In addition, we rely on various financial institutions to provide ACH services in support of funds settlement for certain of our products. If we are unable to obtain such ACH services
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in the future, that could have a material adverse effect on our business, financial position and results of operations. In addition, we may issue credit to consumers, financial institutions or other businesses as part of the funds settlement. A default on this credit by a counterparty could result in a financial loss to us. Furthermore, if one of our customers for which we facilitate settlement suffers a fraudulent event due to an error of their controls, we may suffer a financial loss if the customer does not have sufficient capital to cover the loss.
Our business is subject to the risks of international operations, including movements in foreign currency exchange rates.
Our international operations represent approximately 20% of total 2012 revenues, which are largely conducted in currencies other than the U.S. Dollar, including the Brazilian Real, British Pound and Euro. As a result, our financial condition and operating results could be significantly affected by risks associated with international activities, including economic and labor conditions, political instability, tax laws (including U.S. taxes on foreign subsidiaries), differences in business practices and changes in the value of the U.S. Dollar versus local currencies. In addition, we are less well-known internationally than in the United States, have less experience with local business conditions and may face challenges in successfully managing small operations located far from our headquarters, because of the greater difficulty in overseeing and guiding operations from a distance.
As we expand our international operations, more of our customers may pay us in foreign currencies. Conducting business in currencies other than U.S. Dollars subjects us to fluctuations in currency exchange rates. Our primary exposure to movements in foreign currency exchange rates relates to foreign currencies in Brazil, Europe, Australia and parts of Asia. The U.S. Dollar value of our net investments in foreign operations, the periodic conversion of foreign-denominated earnings to the U.S. Dollar (our reporting currency), our results of operations and, in some cases, cash flows, could be adversely affected in a material manner by movements in foreign currency exchange rates. These risks could cause an adverse effect on our business, financial position and results of operations.
Failure to attract and retain skilled technical employees or senior management personnel could harm our ability to grow.
Our future success depends upon our ability to attract and retain highly-skilled technical personnel. Because the development of our products and services requires knowledge of computer hardware, operating system software, system management software and application software, our technical personnel must be proficient in a number of disciplines. Competition for such technical personnel is intense, and our failure to hire and retain talented personnel could have a material adverse effect on our business, operating results and financial condition.
Our future growth will also require sales and marketing, financial and administrative personnel to develop and support new products and services, to enhance and support current products and services and to expand operational and financial systems. There can be no assurance that we will be able to attract and retain the necessary personnel to accomplish our growth strategies and we may experience constraints that could adversely affect our ability to satisfy client demand in a timely fashion.
Our ability to maintain compliance with applicable laws, rules and regulations and to manage and monitor the risks facing our business relies upon the ability to maintain skilled compliance, security, risk and audit professionals. Competition for such skillsets is intense, and our failure to hire and retain talented personnel could have an adverse effect on our internal control environment and impact our operating results.
Our senior management team has significant experience in the financial services industry, either at FIS or with clients or competitors, and the loss of this leadership could have an adverse effect on our business, operating results and financial condition. Further, the loss of this leadership may have an adverse impact on senior management's ability to provide effective oversight and strategic direction for all key functions within the Company, which could impact our future business, operating results and financial condition.
We are the subject of various legal proceedings that could have a material adverse effect on our revenue and profitability.
We are involved in various litigation matters, including in some cases class-action and patent infringement litigation, and also are involved in or the subject of governmental or regulatory agency inquiries or investigations from time to time. If we are unsuccessful in our defense in the litigation matters, or compliance with any governmental or regulatory rules, we may be forced to pay damages or fines and/or change our business practices, any of which could have a material adverse effect on our business and results of operations.
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Unfavorable resolution of tax contingencies could adversely affect our tax expense.
Our tax returns and positions are subject to review and audit by Federal, state, local and international taxing authorities. An unfavorable outcome to a tax audit could result in higher tax expense, and could negatively impact our effective tax rate, financial position, results of operations and cash flows in the current and/or future periods.
Risks Related to Business Combinations and Ventures
We have a substantial investment in our Brazilian Venture and drive significant revenue through that venture that would be lost and result in significant termination costs if our venture partner were to terminate the agreement.
Revenue attributable to our Brazilian Venture partner, Banco Bradesco, accounted for $287.6 million in 2012. The contract that we have with our Brazilian Venture partner allows for the termination of the contract at any point during the 10-year term, which ends September 30, 2020. This risk of contract termination is mitigated by guaranteed performance targets and minimum payments that would be triggered upon the event of an early termination. These payments have been established based on FIS' expected rate of return for the contract over a 10-year period. The required payments and buyouts decline each year and are further reduced by returns in excess of the expected returns for the contract and reduce the overall barrier to exiting the venture. If our partner were to exit the agreement, this could have a significant impact on our future revenue and growth. For further detail on our Brazilian Venture see Note 6 to the Consolidated Financial Statements.
Additionally, we employ approximately 10,200 employees in Brazil who would have the ability to file labor claims if their employment is terminated. If our Brazilian Venture partner were to terminate the agreement, we may be subject to labor claims filed by employees of the Brazilian Venture. These claims, if realized, could result in a significant cost and impact to our earnings.
We have substantial investments in recorded goodwill and other intangible assets as a result of prior acquisitions, and a severe or extended economic downturn could cause these investments to become impaired, requiring write-downs that would reduce our operating income.
As of December 31, 2012, goodwill aggregated to $8,381.5 million, or 61.9% of total assets, and other indefinite lived intangible assets aggregated to $81.3 million, or 0.6% of total assets. Current accounting rules require goodwill and other indefinite lived intangible assets to be assessed for impairment at least annually or whenever changes in circumstances indicate potential impairment. Factors that may be considered a change in circumstance include significant underperformance relative to historical or projected future operating results, a significant decline in our stock price and market capitalization, and negative industry or economic trends. The results of our 2012 annual assessment of the recoverability of goodwill indicated that the fair values of the Company’s reporting units were in excess of the carrying values of those reporting units, and thus no goodwill impairment existed as of December 31, 2012. Likewise, the fair value of indefinite lived intangible assets was also in excess of the carrying value of those assets as of December 31, 2012. However, if worldwide or United States economic conditions decline significantly with negative impacts to bank spending and consumer behavior, or if other business or market changes impact our outlook, the carrying amount of our goodwill and other indefinite lived intangible assets may no longer be recoverable and we may be required to record an impairment charge, which would have a negative impact on our results of operations and financial condition.
As of December 31, 2012, intangible assets with definite useful lives aggregated to $1,494.9 million, or 11.0% of total assets. Current accounting rules require intangible assets with definite useful lives to be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Factors that may be considered a change in circumstance include significant underperformance relative to historical or projected future operating results, a significant decline in our stock price and market capitalization, and negative industry or economic trends.
We will continue to monitor the fair value of our intangible assets as well as our market capitalization and the impact of any economic downturn on our business to determine if there is an impairment in future periods.
Risks Related to our Indebtedness
Losses, consolidations and failures in the financial services industry may impact our ability to borrow funds or the ability of our lenders to fulfill their obligations under our interest rate swap agreements.
Some financial institutions continue to be challenged by negative operating results. In certain cases, these negative operating results have led to financial institution failures and/or consolidations. As a result, lenders may become insolvent or
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further tighten lending standards, which could in turn make it more difficult or impossible for lenders to perform their obligations under our interest rate swap agreements or for us to borrow under our revolving loan, obtain financing on favorable terms, or obtain financing or interest rate swap agreements at all. Our financial condition and results of operations could be adversely affected if a financial institution fails to fulfill its obligations under our interest rate swap agreements or we are unable to draw funds under our revolving loan or obtain other cost-effective financing.
Our existing levels of debt and debt service requirements may adversely affect our financial condition or operational flexibility and prevent us from fulfilling our obligations under our outstanding indebtedness.
As of December 31, 2012, we had total debt of approximately $4,385.5 million. This level of debt could have adverse consequences for our business, financial condition, operating results and operational flexibility, including the following: (i) the debt level may cause us to have difficulty borrowing money in the future for working capital, capital expenditures, acquisitions or other purposes; (ii) our debt level may limit operational flexibility and our ability to pursue business opportunities and implement certain business strategies; (iii) some of our debt has a variable rate of interest, which exposes us to the risk of increased interest rates; (iv) we have a higher level of debt than some of our competitors or potential competitors, which may cause a competitive disadvantage and may reduce flexibility in responding to changing business and economic conditions, including increased competition and vulnerability to general adverse economic and industry conditions; (v) there are significant maturities on our debt that we may not be able to fulfill or that may be refinanced at higher rates; and (vi) if we fail to satisfy our obligations under our outstanding debt or fail to comply with the financial or other restrictive covenants contained in the indenture governing our senior notes, or our credit facility, an event of default could result that could cause all of our debt to become due and payable.
The covenants relating to our notes and the FIS Credit Agreement are limited and do not prohibit us from incurring additional debt or taking other actions that could exacerbate the risks described in the preceding risk factor or otherwise negatively impact holders of our notes.
We may be able to incur substantially more debt in the future. Although the indenture governing our Notes and the agreements governing the FIS Credit Agreement (as both are defined in Note 13 to the Consolidated Financial Statements) and other indebtedness each contain restrictions on our incurrence of additional indebtedness, these restrictions are subject to a number of qualifications and exceptions, and under certain circumstances, indebtedness incurred in compliance with these restrictions could be substantial. As of December 31, 2012, we had approximately $1,022.9 million of borrowing capacity available under our existing FIS Credit Agreement. To the extent new debt is added to our current levels, the risks described above could substantially increase.
Statement Regarding Forward-Looking Information
The statements contained in this Form 10-K or in our other documents or in oral presentations or other statements made by our management that are not purely historical are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, including statements regarding our expectations, hopes, intentions, or strategies regarding the future. These statements relate to, among other things, future events and our future results and involve a number of risks and uncertainties. Forward-looking statements are based on management's beliefs, as well as assumptions made by, and information currently available to, management. Any statements that refer to beliefs, expectations, projections or other characterizations of future events or circumstances and other statements that are not historical facts are forward-looking statements. In many cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” or “continue,” or the negative of these terms and other comparable terminology. Actual results, performance or achievement could differ materially from those contained in these forward-looking statements. The risks and uncertainties that forward-looking statements are subject to include without limitation:
• | changes in general economic, business and political conditions, including the possibility of intensified international hostilities, acts of terrorism, and changes in either or both the United States and international lending, capital and financial markets; |
• | the effect of legislative initiatives or proposals, statutory changes, governmental or other applicable regulations and/or changes in industry requirements, including privacy regulations; |
• | the risks of reduction in revenue from the elimination of existing and potential customers due to consolidation in or new laws or regulations affecting the banking, retail and financial services industries or due to financial failures or other setbacks suffered by firms in those industries; |
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• | changes in the growth rates of the markets for core processing, card issuer, and transaction processing services; |
• | failures to adapt our services and products to changes in technology or in the marketplace; internal or external security breaches of our systems, including those relating to the theft of personal information and computer viruses affecting our software or platforms, and the reactions of customers, card associations and others to any such events; |
• | the reaction of our current and potential customers to the regulatory letter we received about information security, risk management and internal audit following the security breach we experienced in early 2011 and to any other communications about such topics from our regulators or from us; |
• | competitive pressures on product pricing and services including the ability to attract new, or retain existing, customers; |
• | an operational or natural disaster at one of our major operations centers; and |
• | other risks detailed elsewhere in this Risk Factors section and in our other filings with the Securities and Exchange Commission. |
Other unknown or unpredictable factors also could have a material adverse effect on our business, financial condition, results of operations and prospects. Accordingly, readers should not place undue reliance on these forward-looking statements. These forward-looking statements are inherently subject to uncertainties, risks and changes in circumstances that are difficult to predict. Except as required by applicable law or regulation, we do not undertake (and expressly disclaim) any obligation and do not intend to publicly update or review any of these forward-looking statements, whether as a result of new information, future events or otherwise. You should carefully consider the possibility that actual results may differ materially from our forward-looking statements.
Item 1B. | Unresolved Staff Comments. |
None.
Item 2. | Properties. |
FIS’ corporate headquarters is located at 601 Riverside Avenue, Jacksonville, Florida. In addition, FIS owns or leases support centers, data processing facilities and other facilities at approximately 140 locations. We believe our facilities and equipment are generally well maintained and are in good operating condition. We believe that the computer equipment that we own and our various facilities are adequate for our present and foreseeable business needs.
Item 3. | Legal Proceedings. |
In the ordinary course of business, the Company is involved in various pending and threatened litigation matters related to operations, some of which include claims for punitive or exemplary damages. The Company believes that no actions, other than the matter listed below, depart from customary litigation incidental to its business.
As background to the disclosure below, please note the following:
• | This matter raises difficult and complicated factual and legal issues and is subject to many uncertainties and complexities. |
• | The Company reviews all of its litigation matters on an on-going basis and follows the authoritative provisions for accounting for contingencies when making accrual and disclosure decisions. A liability must be accrued if (a) it is probable that a liability has been incurred and (b) the amount of loss can be reasonably estimated. If one of these criteria has not been met, disclosure is required when there is at least a reasonable possibility that a loss may have been incurred. When assessing reasonably possible and probable outcomes, the Company bases decisions on the assessment of the ultimate outcome following all appeals. Legal fees associated with defending litigation matters are expensed as incurred. |
CheckFree Corporation and CashEdge, Inc. v. Metavante Corporation and Fidelity National Information Services, Inc.
This is a patent infringement action that was filed by CheckFree Corporation and CashEdge, Inc., wholly-owned subsidiaries of Fiserv, Inc., against Fidelity National Information Services, Inc. and our subsidiary, Metavante Corporation (collectively the “Defendants”) in the U.S. District Court for the Middle District of Florida, Jacksonville Division on January 5, 2012. The complaint seeks damages, injunctive relief and attorneys' fees for the alleged infringement of three patents. Plaintiffs allege that the Defendants infringe the patents at issue by providing customers financial and payment solutions that process payment instructions, provide electronic biller notifications, and/or process account-to-account funds transfer
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transactions and have requested financial damages and injunctive relief. Defendants filed their Answer and Counterclaims to Plaintiffs' complaint for patent infringement denying the claims of patent infringement and asserting defenses, including non-infringement and invalidity. Additionally, Defendants filed counterclaims asserting patent infringement of three patents and adding Fiserv, Inc. as a Counter Defendant. Defendants seek damages, injunctive relief and attorneys' fees. Plaintiffs and Counter Defendant Fiserv, Inc., filed their Answer to Defendants' counterclaims denying the claims of patent infringement and asserting defenses, including non-infringement and invalidity. In the second quarter of 2012, the Defendants filed a Motion for Judgment on the Pleadings and a Motion to Stay Discovery. The Court subsequently denied the Motion to Stay Discovery but has not yet ruled on the Motion for Judgment on the Pleadings. In the third quarter of 2012, the Court entered a Case Management and Scheduling Order. In the fourth quarter of 2012, the Court granted Plaintiffs' Motion to Amend its First Amended Complaint to add a fourth patent and Defendants' Motion to Amend its First Amended Answer and Counterclaims. The Motion for Judgment on the Pleadings was denied as moot following entry of the amended complaint adding claims with respect to a fourth patent. On December 3, 2012, Defendants filed a Motion for Summary Judgment seeking an order invalidating all of the Plaintiffs' asserted patents. On January 15, 2013, Plaintiffs filed a Motion for Summary Judgment seeking to invalidate select patent claims from one of Defendants' asserted patents. The Court has not yet ruled on either of the summary judgment motions. Trial is scheduled for January 2014. Discovery is ongoing. Due to the early stage of this matter, an estimate of a possible loss or range of loss, if any, for this action cannot be made at this time.
Indemnifications and Warranties
The Company generally indemnifies its customers, subject to certain exceptions, against damages and costs resulting from claims of patent, copyright, or trademark infringement associated with its customers' use of the Company's products or services. Historically, the Company has not made any significant payments under such indemnifications, but continues to monitor the conditions that are subject to the indemnifications to identify whether it is probable that a loss has occurred, and would recognize any such losses when they are estimable. In addition, the Company warrants to customers that its software operates substantially in accordance with the software specifications. Historically, no significant costs have been incurred related to software warranties and no accruals for warranty costs have been made.
Item 4. | Mine Safety Disclosures. |
Not applicable.
PART II
Item 5. | Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities. |
Our common stock trades on the New York Stock Exchange under the ticker symbol “FIS.” The table set forth below provides the high and low closing sales prices of the common stock and the cash dividends declared per share of common stock for each quarter of 2012 and 2011.
High | Low | Dividend | |||||||||
2012 | |||||||||||
First Quarter | $ | 33.35 | $ | 26.43 | $ | 0.20 | |||||
Second Quarter | $ | 34.08 | $ | 31.24 | $ | 0.20 | |||||
Third Quarter | $ | 34.80 | $ | 30.71 | $ | 0.20 | |||||
Fourth Quarter | $ | 36.97 | $ | 30.89 | $ | 0.20 | |||||
2011 | |||||||||||
First Quarter | $ | 32.79 | $ | 27.95 | $ | 0.05 | |||||
Second Quarter | $ | 33.54 | $ | 30.07 | $ | 0.05 | |||||
Third Quarter | $ | 31.32 | $ | 24.10 | $ | 0.05 | |||||
Fourth Quarter | $ | 27.31 | $ | 22.58 | $ | 0.05 | |||||
As of January 31, 2013, there were approximately 14,000 shareholders of record of our common stock.
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 in the
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first quarter of 2013. However, the declaration and payment of future dividends is at the discretion of our Board of Directors and depends on, among other things, our investment policy and 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 our debt agreements. A regular quarterly dividend of $0.22 per common share is payable March 29, 2013 to shareholders of record as of the close of business on March 15, 2013.
Item 12 of Part III contains information concerning securities authorized for issuance under our equity compensation plans.
On February 7, 2012, our Board of Directors approved a plan authorizing repurchases of our common stock in the open market at prevailing market prices or in privately negotiated transactions of up to $1,000.0 million through December 31, 2015. This share repurchase authorization replaced any existing share repurchase authorization. We repurchased 10.3 million shares of our common stock for $350.3 million at an average price of $33.84 during the year ended December 31, 2012, under this plan, including the repurchase of 5.7 million shares from WPM, L.P. for $200.0 million, or $35.03 per share, in December 2012. Approximately $649.7 million of plan capacity remained available for repurchases as of December 31, 2012.
On October 18, 2011, our Board of Directors approved a plan authorizing repurchases of up to $500.0 million of our outstanding common stock through December 31, 2013. We repurchased 1.4 million shares of our common stock for $38.0 million at an average price of $26.51 during the year ended December 31, 2011 under this plan. In January 2012, we repurchased an additional 3.7 million shares of our common stock for $101.1 million at an average price of $27.32. This plan was replaced by the February 7, 2012 authorization plan approved by our Board of Directors.
On February 4, 2010, our Board of Directors approved a plan authorizing repurchases of up to 15.0 million shares of our common stock in the open market at prevailing market prices or in privately negotiated transactions through January 31, 2013. We repurchased 1.4 million shares of our common stock for $32.2 million at an average price of $22.97 in 2010 under this plan. We repurchased an additional 13.6 million shares of our common stock for $361.2 million at an average price of $26.56 during the year ended December 31, 2011 under this plan. No additional shares of our common stock remain available to repurchase under this plan as of December 31, 2012.
On May 25, 2010, our Board of Directors authorized a leveraged recapitalization plan to repurchase up to $2.5 billion of our common stock at a price range of $29.00 - $31.00 per share of common stock through a modified "Dutch auction" tender offer (the "Tender Offer"). The Tender Offer commenced on July 6, 2010 and expired on August 3, 2010. The Tender Offer was oversubscibed at $29.00, resulting in the purchase of 86.2 million shares, including 6.4 million shares underlying previously unexercised stock options. The repurchased shares were added to treasury stock.
Stock Performance Graph
The performance graph below shows the cumulative total shareholder return on our common stock for the period starting on December 31, 2007, and ending on December 31, 2012. This is compared with the cumulative total returns over the same period of (1) the S&P 500 Index and (2) the S&P Supercap Data Processing & Outsourced Services Index (peer group). The graph assumes that on December 31, 2007, $100 was invested in our common stock and $100 was invested in the other two indices, with dividends reinvested on the date of payment without payment of any commissions. The performance shown in the graph represents past performance and should not be considered an indication of future performance.
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12/07 | 12/08 | 12/09 | 12/10 | 12/11 | 12/12 | ||||||||
Fidelity National Information Services, Inc. | 100.00 | 70.08 | 101.93 | 120.01 | 117.34 | 157.38 | |||||||
S&P 500 | 100.00 | 63.00 | 79.67 | 91.67 | 93.61 | 108.59 | |||||||
S&P Supercap Data Processing & Outsourced Services | 100.00 | 68.26 | 99.41 | 97.33 | 118.68 | 151.90 | |||||||
Item 6. | Selected Financial Data. |
The selected financial data set forth below constitutes historical financial data of FIS and should be read in conjunction with Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, and Item 8, Financial Statements and Supplementary Data, included elsewhere in this report.
On October 1, 2009, we completed the acquisition of Metavante Technologies, Inc. ("Metavante"). The results of operations and financial position of Metavante are included in the Consolidated Financial Statements since the date of acquisition.
On July 2, 2008, we completed the spin-off of Lender Processing Services, Inc., which was a former wholly-owned subsidiary ("LPS") . For accounting purposes, the results of LPS are presented as discontinued operations. Accordingly, all prior periods have been restated to present the results of FIS on a stand alone basis and include the results of LPS up to July 2, 2008, as discontinued operations.
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Year Ended December 31, | |||||||||||||||||||
2012 | 2011 | 2010 | 2009 | 2008 | |||||||||||||||
(In millions, except per share data) | |||||||||||||||||||
Statement of Earnings Data: | |||||||||||||||||||
Processing and services revenues | $ | 5,807.6 | $ | 5,625.6 | $ | 5,145.6 | $ | 3,680.1 | $ | 3,359.5 | |||||||||
Cost of revenues | 3,946.9 | 3,919.1 | 3,553.7 | 2,720.5 | 2,616.1 | ||||||||||||||
Gross profit | 1,860.7 | 1,706.5 | 1,591.9 | 959.6 | 743.4 | ||||||||||||||
Selling, general and administrative expenses | 781.5 | 647.9 | 654.0 | 541.6 | 381.0 | ||||||||||||||
Impairment charges | — | 9.1 | 154.9 | 136.9 | 26.0 | ||||||||||||||
Operating income | 1,079.2 | 1,049.5 | 783.0 | 281.1 | 336.4 | ||||||||||||||
Total other income (expense) | (248.0 | ) | (322.5 | ) | (184.9 | ) | (121.9 | ) | (155.6 | ) | |||||||||
Earnings from continuing operations before income taxes and equity in loss of unconsolidated entities | 831.2 | 727.0 | 598.1 | 159.2 | 180.8 | ||||||||||||||
Provision for income taxes | 270.9 | 232.4 | 208.4 | 53.0 | 57.6 | ||||||||||||||
Equity in loss of unconsolidated entities | — | — | — | — | (0.2 | ) | |||||||||||||
Earnings from continuing operations, net of tax | 560.3 | 494.6 | 389.7 | 106.2 | 123.0 | ||||||||||||||
Earnings (loss) from discontinued operations, net of tax | (79.2 | ) | (13.5 | ) | (31.8 | ) | 2.3 | 96.5 | |||||||||||
Net earnings | 481.1 | 481.1 | 357.9 | 108.5 | 219.5 | ||||||||||||||
Net (earnings) loss attributable to noncontrolling interest | (19.9 | ) | (11.5 | ) | 46.6 | (2.6 | ) | (4.7 | ) | ||||||||||
Net earnings attributable to FIS | $ | 461.2 | $ | 469.6 | $ | 404.5 | $ | 105.9 | $ | 214.8 | |||||||||
Net earnings per share — basic from continuing operations attributable to FIS common stockholders | $ | 1.85 | $ | 1.61 | $ | 1.26 | $ | 0.44 | $ | 0.62 | |||||||||
Net earnings (loss) per share — basic from discontinued operations attributable to FIS common stockholders | (0.27 | ) | (0.04 | ) | (0.09 | ) | 0.01 | 0.50 | |||||||||||
Net earnings per share — basic attributable to FIS common stockholders | $ | 1.58 | $ | 1.56 | $ | 1.17 | $ | 0.45 | $ | 1.12 | |||||||||
Weighted average shares — basic | 291.8 | 300.6 | 345.1 | 236.4 | 191.6 | ||||||||||||||
Net earnings per share — diluted from continuing operations attributable to FIS common stockholders | $ | 1.82 | $ | 1.57 | $ | 1.24 | $ | 0.43 | $ | 0.61 | |||||||||
Net earnings (loss) per share — diluted from discontinued operations attributable to FIS common stockholders | (0.27 | ) | (0.04 | ) | (0.09 | ) | 0.01 | 0.50 | |||||||||||
Net earnings per share — diluted attributable to FIS common stockholders | $ | 1.55 | $ | 1.53 | $ | 1.15 | $ | 0.44 | $ | 1.11 | |||||||||
Weighted average shares — diluted | 297.5 | 307.0 | 352.0 | 239.4 | 193.5 | ||||||||||||||
Amounts attributable to FIS common stockholders: | |||||||||||||||||||
Earnings from continuing operations, net of tax | $ | 540.4 | $ | 483.1 | $ | 436.3 | $ | 103.6 | $ | 118.9 | |||||||||
Earnings (loss) from discontinued operations, net of tax | (79.2 | ) | (13.5 | ) | (31.8 | ) | 2.3 | 95.9 | |||||||||||
Net earnings attributable to FIS common stockholders | $ | 461.2 | $ | 469.6 | $ | 404.5 | $ | 105.9 | $ | 214.8 | |||||||||
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As of December 31, | |||||||||||||||||||
2012 | 2011 | 2010 | 2009 | 2008 | |||||||||||||||
(In millions, except per share data) | |||||||||||||||||||
Balance Sheet Data: | |||||||||||||||||||
Cash and cash equivalents | $ | 517.6 | $ | 415.5 | $ | 338.0 | $ | 430.9 | $ | 220.9 | |||||||||
Goodwill | 8,381.5 | 8,542.8 | 8,550.0 | 8,232.9 | 4,194.0 | ||||||||||||||
Other intangible assets, net | 1,576.2 | 1,903.3 | 2,202.9 | 2,396.8 | 924.3 | ||||||||||||||
Total assets | 13,549.7 | 13,873.2 | 14,176.3 | 13,997.6 | 7,500.4 | ||||||||||||||
Total long-term debt | 4,385.5 | 4,809.8 | 5,192.1 | 3,253.3 | 2,514.5 | ||||||||||||||
Total FIS stockholders’ equity | 6,640.9 | 6,503.0 | 6,403.2 | 8,308.9 | 3,532.8 | ||||||||||||||
Noncontrolling interest | 152.7 | 148.2 | 158.4 | 209.7 | 164.2 | ||||||||||||||
Total equity | 6,793.6 | 6,651.2 | 6,561.6 | 8,518.6 | 3,697.0 | ||||||||||||||
Cash dividends declared per share | $ | 0.80 | $ | 0.20 | $ | 0.20 | $ | 0.20 | $ | 0.20 | |||||||||
Selected Quarterly Financial Data
Selected unaudited quarterly financial data is as follows:
Quarter Ended | |||||||||||||||
March 31, | June 30, | September 30, | December 31, | ||||||||||||
(In millions, except per share data) | |||||||||||||||
2012 | |||||||||||||||
Processing and services revenues | $ | 1,413.4 | $ | 1,457.2 | $ | 1,436.9 | $ | 1,500.1 | |||||||
Gross profit | 423.9 | 476.1 | 468.1 | 492.6 | |||||||||||
Earnings from continuing operations before income taxes | 142.2 | 224.3 | 232.4 | 232.3 | |||||||||||
Net earnings attributable to FIS common stockholders | 87.1 | 150.6 | 86.8 | 136.7 | |||||||||||
Net earnings per share — basic attributable to FIS common stockholders | $ | 0.30 | $ | 0.51 | $ | 0.30 | $ | 0.47 | |||||||
Net earnings per share — diluted attributable to FIS common stockholders | $ | 0.29 | $ | 0.50 | $ | 0.29 | $ | 0.46 | |||||||
2011 | |||||||||||||||
Processing and services revenues | $ | 1,352.8 | $ | 1,413.3 | $ | 1,398.2 | $ | 1,461.3 | |||||||
Gross profit | 376.5 | 423.9 | 432.9 | 473.2 | |||||||||||
Earnings from continuing operations before income taxes | 145.0 | 188.6 | 211.9 | 181.5 | |||||||||||
Net earnings attributable to FIS common stockholders | 92.8 | 123.5 | 136.3 | 117.0 | |||||||||||
Net earnings per share — basic attributable to FIS common stockholders | $ | 0.31 | $ | 0.41 | $ | 0.45 | $ | 0.39 | |||||||
Net earnings per share — diluted attributable to FIS common stockholders | $ | 0.30 | $ | 0.40 | $ | 0.44 | $ | 0.39 | |||||||
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Item 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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,
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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.
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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.
Item 7A. | Quantitative and Qualitative Disclosure About Market Risks |
Market Risk
We are exposed to market risks primarily from changes in interest rates and foreign currency exchange rates. We use certain derivative financial instruments, including interest rate swaps and foreign currency forward exchange contracts, to manage interest rate and foreign currency risk. We do not use derivatives for trading purposes, to generate income or to engage in speculative activity.
Interest Rate Risk
In addition to existing cash balances and cash provided by operating activities, we use fixed rate and variable rate debt to finance our operations. We are exposed to interest rate risk on these debt obligations and related interest rate swaps.
The Notes (as defined in Note 13 to the Consolidated Financial Statements) represent substantially all of our fixed-rate long-term debt obligations. The carrying value of the Notes was $1,950.0 million as of December 31, 2012. The fair value of the Notes was approximately $2,138.2 million as of December 31, 2012. The potential reduction in fair value of the Notes from a hypothetical 10 percent increase in market interest rates would not be material to the overall fair value of the debt.
Our floating rate long-term debt obligations principally relate to borrowings under the FIS Credit Agreement (as also defined in Note 13 to the Consolidated Financial Statements). An increase of 100 basis points in the LIBOR rate would increase our annual debt service under the FIS Credit Agreement, after we include the impact of our interest rate swaps, by $9.3 million (based on principal amounts outstanding as of December 31, 2012). We performed the foregoing sensitivity analysis based on the principal amount of our floating rate debt as of December 31, 2012, less the principal amount of such debt that was then subject to an interest rate swap converting such debt into fixed rate debt. This sensitivity analysis is based solely on
38
the principal amount of such debt as of December 31, 2012, and does not take into account any changes that occurred in the prior 12 months or that may take place in the next 12 months in the amount of our outstanding debt or in the notional amount of outstanding interest rate swaps in respect of our debt. Further, in this sensitivity analysis, the change in interest rates is assumed to be applicable for an entire year. For comparison purposes, based on principal amounts on floating rate debt outstanding as of December 31, 2011, and calculated in the same manner as set forth above, an increase of 100 basis points in the LIBOR rate would have increased our annual interest expense, after we calculate the impact of our interest rate swaps, by $12.9 million.
We use interest rate swaps for the purpose of managing our interest expense through the mix of fixed rate and floating rate debt. During the year ended December 31, 2012, the notional amount of our outstanding interest rate swaps increased by $550.0 million. As of December 31, 2012, we have entered into the following interest rate swap transactions converting a portion of the interest rate exposure on our Term and Revolving Loans from variable to fixed (in millions):
Effective date | Termination date | Notional amount | Bank pays variable rate of | FIS pays fixed rate of | ||||||||
February 1, 2011 | February 1, 2013 | $ | 200.0 | One Month LIBOR (1) | 0.62 | % | (2) | |||||
May 3, 2011 | May 1, 2013 | 400.0 | One Month LIBOR (1) | 0.73 | % | (2) | ||||||
September 1, 2011 | September 1, 2014 | 150.0 | One Month LIBOR (1) | 0.74 | % | (2) | ||||||
September 1, 2011 | September 1, 2014 | 150.0 | One Month LIBOR (1) | 0.74 | % | (2) | ||||||
September 1, 2011 | September 1, 2014 | 300.0 | One Month LIBOR (1) | 0.72 | % | (2) | ||||||
July 1, 2012 | July 1, 2015 | 300.0 | One Month LIBOR (1) | 0.58 | % | (2) | ||||||
February 1, 2013 | February 3, 2014 | 200.0 | One Month LIBOR (1) | 0.28 | % | (2) | ||||||
February 1, 2013 | February 3, 2014 | 200.0 | One Month LIBOR (1) | 0.28 | % | (2) | ||||||
February 3, 2014 | February 1, 2017 | 400.0 | One Month LIBOR (1) | 0.89 | % | (2) | ||||||
$ | 2,300.0 | |||||||||||
________________________
(1) | 0.21% in effect as of December 31, 2012. |
(2) | Does not include the applicable margin and facility fees paid to lenders on term loans and revolving loans as described above. |
We have designated these interest rate swaps as cash flow hedges for accounting purposes. A portion of the amount included in accumulated other comprehensive earnings is reclassified into interest expense as a yield adjustment as interest payments are made on the Term and Revolving Loans. In accordance with the authoritative guidance for fair value measurements, the inputs used to determine the estimated fair value of our interest rate swaps are Level 2-type measurements. We considered our own credit risk and the credit risk of the counterparties when determining the fair value of our interest rate swaps.
Foreign Currency Risk
We are exposed to foreign currency risks that arise from normal business operations. These risks include the translation of local currency balances of foreign subsidiaries, transaction gains and losses associated with intercompany loans with foreign subsidiaries and transactions denominated in currencies other than a location's functional currency. Our objective is to minimize our exposure to these risks through a combination of normal operating activities and the use of foreign currency forward exchange contracts. Contracts are denominated in currencies of major industrial countries.
Our exposure to foreign currency exchange risks generally arises from our non-U.S. operations, to the extent they are conducted in local currency. Changes in foreign currency exchange rates affect translations of revenues denominated in currencies other than the U.S. Dollar. Our international operations generated approximately $1,180.5 million in revenues during the year ended December 31, 2012, of which approximately $1,009.2 million was denominated in currencies other than the U.S. Dollar. The major currencies to which our revenues are exposed are the Brazilian Real, the Euro, the British Pound Sterling and the Indian Rupee. A 10% move in average exchange rates for these currencies (assuming a simultaneous and immediate 10% change in all of such rates for the relevant period) would have resulted in the following increase or (decrease) in our reported revenues for the years ended December 31, 2012, 2011 and 2010 (in millions):
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Currency | 2012 | 2011 | 2010 | |||||||||
Real | $ | 40.4 | $ | 42.4 | $ | 32.5 | ||||||
Euro | 27.1 | 26.4 | 18.6 | |||||||||
Pound Sterling | 18.5 | 17.6 | 9.0 | |||||||||
Indian Rupee | 4.3 | 3.6 | 2.6 | |||||||||
Total impact | $ | 90.3 | $ | 90.0 | $ | 62.7 | ||||||
The impact on earnings of the foregoing assumed 10% change in each of the periods presented would not have been significant.
Revenue included $100.8 million and operating income included $9.0 million of unfavorable foreign currency impact during 2012 resulting from a stronger U.S. Dollar during 2012 compared to 2011.
Our foreign exchange risk management policy permits the use of derivative instruments, such as forward contracts and options, to reduce volatility in our results of operations and/or cash flows resulting from foreign exchange rate fluctuations. Our international operations' revenues and expenses are generally denominated in local currency, which limits the economic exposure to foreign exchange risk in those jurisdictions. We do not enter into foreign currency derivative instruments for trading purposes. We have entered into foreign currency forward exchange contracts to hedge foreign currency exposure to intercompany loans. As of December 31, 2012, the notional amount of these derivatives was approximately $115.6 million and the fair value was nominal. These derivatives are intended to hedge the foreign exchange risks related to intercompany loans, but have not been designated as hedges for accounting purposes.
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Item 8. Financial Statements and Supplementary Data
FIDELITY NATIONAL INFORMATION SERVICES, INC.
AND SUBSIDIARIES
INDEX TO FINANCIAL INFORMATION
Page Number | |
41
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
Fidelity National Information Services, Inc.:
We have audited Fidelity National Information Services, Inc.’s and subsidiaries’ (the “Company”) internal control over financial reporting as of December 31, 2012, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, Fidelity National Information Services, Inc. and subsidiaries maintained, in all material respects, effective internal control over financial reporting as of December 31, 2012, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Fidelity National Information Services, Inc. and subsidiaries as of December 31, 2012 and 2011, and the related consolidated statements of earnings, comprehensive earnings, equity, and cash flows for each of the years in the three-year period ended December 31, 2012, and our report dated February 26, 2013 expressed an unqualified opinion on those consolidated financial statements.
/s/ KPMG LLP
February 26, 2013
Jacksonville, Florida
Certified Public Accountants
42
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
Fidelity National Information Services, Inc.:
We have audited the accompanying consolidated balance sheets of Fidelity National Information Services, Inc. and subsidiaries (the “Company”) as of December 31, 2012 and 2011, and the related consolidated statements of earnings, comprehensive earnings, equity, and cash flows for each of the years in the three-year period ended December 31, 2012. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Fidelity National Information Services, Inc. and subsidiaries as of December 31, 2012 and 2011, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2012, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Fidelity National Information Services, Inc.’s and subsidiaries’ internal control over financial reporting as of December 31, 2012, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated February 26, 2013, expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
/s/ KPMG LLP
February 26, 2013
Jacksonville, Florida
Certified Public Accountants
43
FIDELITY NATIONAL INFORMATION SERVICES, INC.
AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 2012 and 2011
(In millions, except per share amounts)
2012 | 2011 | ||||||
ASSETS | |||||||
Current assets: | |||||||
Cash and cash equivalents | $ | 517.6 | $ | 415.5 | |||
Settlement deposits | 32.6 | 43.9 | |||||
Trade receivables, net | 925.7 | 858.5 | |||||
Settlement receivables | 128.3 | 78.1 | |||||
Other receivables | 30.2 | 30.0 | |||||
Due from related parties | 42.0 | 56.9 | |||||
Prepaid expenses and other current assets | 111.9 | 117.1 | |||||
Deferred income taxes | 55.9 | 74.0 | |||||
Total current assets | 1,844.2 | 1,674.0 | |||||
Property and equipment, net | 419.5 | 414.5 | |||||
Goodwill | 8,381.5 | 8,542.8 | |||||
Intangible assets, net | 1,576.2 | 1,903.3 | |||||
Computer software, net | 847.0 | 881.5 | |||||
Deferred contract costs | 211.2 | 232.7 | |||||
Other noncurrent assets | 270.1 | 224.4 | |||||
Total assets | $ | 13,549.7 | $ | 13,873.2 | |||
LIABILITIES AND EQUITY | |||||||
Current liabilities: | |||||||
Accounts payable and accrued liabilities | $ | 624.6 | $ | 642.9 | |||
Due to Brazilian venture partner | 18.8 | 36.5 | |||||
Settlement payables | 172.2 | 141.2 | |||||
Current portion of long-term debt | 153.9 | 259.2 | |||||
Deferred revenues | 287.3 | 276.5 | |||||
Total current liabilities | 1,256.8 | 1,356.3 | |||||
Deferred revenues | 42.2 | 55.9 | |||||
Deferred income taxes | 821.8 | 884.1 | |||||
Long-term debt, excluding current portion | 4,231.6 | 4,550.6 | |||||
Due to Brazilian venture partner | 40.5 | 50.6 | |||||
Other long-term liabilities | 363.2 | 324.5 | |||||
Total liabilities | 6,756.1 | 7,222.0 | |||||
Equity: | |||||||
FIS stockholders’ equity: | |||||||
Preferred stock, $0.01 par value, 200 shares authorized, none issued and outstanding as of December 31, 2012 and 2011 | — | — | |||||
Common stock, $0.01 par value, 600 shares authorized, 385.9 and 384.6 shares issued as of December 31, 2012 and 2011, respectively | 3.8 | 3.8 | |||||
Additional paid in capital | 7,197.0 | 7,224.7 | |||||
Retained earnings | 2,105.8 | 1,880.4 | |||||
Accumulated other comprehensive earnings | 30.0 | 36.3 | |||||
Treasury stock, $0.01 par value, 91.8 and 91.7 shares as of December 31, 2012 and 2011, respectively, at cost | (2,695.7 | ) | (2,642.2 | ) | |||
Total FIS stockholders’ equity | 6,640.9 | 6,503.0 | |||||
Noncontrolling interest | 152.7 | 148.2 | |||||
Total equity | 6,793.6 | 6,651.2 | |||||
Total liabilities and equity | $ | 13,549.7 | $ | 13,873.2 | |||
The accompanying notes are an integral part of these consolidated financial statements.
44
FIDELITY NATIONAL INFORMATION SERVICES, INC.
AND SUBSIDIARIES
Consolidated Statements of Earnings
Years Ended December 31, 2012, 2011 and 2010
(In millions, except per share amounts)
2012 | 2011 | 2010 | |||||||||
Processing and services revenues (for related party activity, see note 4) | $ | 5,807.6 | $ | 5,625.6 | $ | 5,145.6 | |||||
Cost of revenues (for related party activity, see note 4) | 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 (for related party activity, see note 4) | 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 | ||||||||
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 common stockholders | $ | 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 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 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 | |||||
Loss from discontinued operations, net of tax | (79.2 | ) | (13.5 | ) | (31.8 | ) | |||||
Net earnings attributable to FIS common stockholders | $ | 461.2 | $ | 469.6 | $ | 404.5 | |||||
* Amounts may not sum due to rounding.
The accompanying notes are an integral part of these consolidated financial statements.
45
FIDELITY NATIONAL INFORMATION SERVICES, INC.
AND SUBSIDIARIES
Consolidated Statements of Comprehensive Earnings
Years Ended December 31, 2012, 2011 and 2010
(In millions, except per share data)
Years ended December 31, | |||||||||||||||||||||||
2012 | 2011 | 2010 | |||||||||||||||||||||
Net earnings | $ | 481.1 | $ | 481.1 | $ | 357.9 | |||||||||||||||||
Other comprehensive earnings, before tax: | |||||||||||||||||||||||
Unrealized gain (loss) on investments and derivatives | $ | 5.1 | $ | (32.5 | ) | $ | (13.0 | ) | |||||||||||||||
Reclassification adjustment for gains (losses) included in net earnings | (3.5 | ) | 30.9 | 17.4 | |||||||||||||||||||
Unrealized gain (loss) on investments and derivatives, net | 1.6 | (1.6 | ) | 4.4 | |||||||||||||||||||
Foreign currency translation adjustments | (15.2 | ) | (65.6 | ) | 10.7 | ||||||||||||||||||
Minimum pension liability adjustments | |||||||||||||||||||||||