Fidelity National Information Services, Inc.
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2007
Or
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o |
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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)
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Georgia
(State or other jurisdiction
of incorporation or organization)
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37-1490331
(I.R.S. Employer
Identification No.) |
601 Riverside Avenue
Jacksonville, Florida
(Address of principal executive offices)
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32204
(Zip Code) |
(904) 854-8100
(Registrants telephone number, including area code)
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 þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated
filer in Rule 12b-2 of the Exchange Act.
Large accelerated filer þ Accelerated filer o Non-accelerated filer o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act) Yes o No þ
As of June 30, 2007, 193,053,151 shares of the Registrants Common Stock were outstanding.
FORM 10-Q
QUARTERLY REPORT
Quarter Ended June 30, 2007
INDEX
See accompanying notes to unaudited consolidated financial statements.
2
FIDELITY NATIONAL INFORMATION SERVICES, INC.
AND SUBSIDIARIES
Consolidated Balance Sheets
(In thousands)
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June 30, 2007 |
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December 31, |
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|
(Unaudited) |
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2006 |
|
Assets |
|
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
220,890 |
|
|
$ |
211,753 |
|
Trade receivables, net of allowance for doubtful
accounts of $36.6 million and $31.5 million,
respectively, at June 30, 2007 and December 31,
2006 |
|
|
736,939 |
|
|
|
623,065 |
|
Other receivables |
|
|
169,750 |
|
|
|
159,584 |
|
Settlement deposits |
|
|
33,838 |
|
|
|
25,488 |
|
Settlement receivables |
|
|
21,591 |
|
|
|
18,442 |
|
Receivable from related party |
|
|
20,201 |
|
|
|
5,208 |
|
Prepaid expenses and other current assets |
|
|
163,378 |
|
|
|
148,601 |
|
Deferred income taxes |
|
|
92,239 |
|
|
|
108,398 |
|
|
|
|
|
|
|
|
Total current assets |
|
|
1,458,826 |
|
|
|
1,300,539 |
|
|
|
|
|
|
|
|
Property and equipment, net of accumulated depreciation
and amortization of $275.9 million and $261.7 million,
respectively, at June 30, 2007 and December 31, 2006 |
|
|
352,973 |
|
|
|
345,799 |
|
Goodwill |
|
|
3,781,367 |
|
|
|
3,737,540 |
|
Intangible assets, net of accumulated amortization of
$527.5 million and $449.5 million, respectively, at June
30, 2007 and December 31, 2006 |
|
|
943,560 |
|
|
|
1,009,978 |
|
Computer software, net of accumulated amortization of
$257.5 million and $324.2 million, respectively, at June
30, 2007 and December 31, 2006 |
|
|
674,708 |
|
|
|
640,815 |
|
Deferred contract costs |
|
|
244,500 |
|
|
|
233,996 |
|
Investment in unconsolidated entities |
|
|
166,534 |
|
|
|
195,739 |
|
Long term lease receivables |
|
|
63,860 |
|
|
|
52,702 |
|
Other noncurrent assets |
|
|
108,888 |
|
|
|
113,452 |
|
|
|
|
|
|
|
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Total assets |
|
$ |
7,795,216 |
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|
$ |
7,630,560 |
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|
|
|
|
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Liabilities and Stockholders Equity |
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|
|
|
|
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Current liabilities: |
|
|
|
|
|
|
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|
Accounts payable and accrued liabilities |
|
$ |
548,840 |
|
|
$ |
520,016 |
|
Settlement payables |
|
|
55,429 |
|
|
|
43,930 |
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Current portion of long-term debt |
|
|
113,621 |
|
|
|
61,661 |
|
Deferred revenues |
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|
262,017 |
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|
254,908 |
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|
|
|
|
|
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Total current liabilities |
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|
979,907 |
|
|
|
880,515 |
|
|
|
|
|
|
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Deferred revenues |
|
|
104,231 |
|
|
|
104,479 |
|
Deferred income taxes |
|
|
381,558 |
|
|
|
396,263 |
|
Long-term debt, including a note payable to FNF of $13.0
million and $13.9 million at June 30, 2007 and December
31, 2006, respectively, excluding current portion |
|
|
2,738,803 |
|
|
|
2,947,840 |
|
Other long-term liabilities |
|
|
138,240 |
|
|
|
145,749 |
|
|
|
|
|
|
|
|
Total liabilities |
|
|
4,342,739 |
|
|
|
4,474,846 |
|
|
|
|
|
|
|
|
Minority interest |
|
|
12,458 |
|
|
|
12,970 |
|
|
|
|
|
|
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|
Stockholders equity: |
|
|
|
|
|
|
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Preferred stock $0.01 par value; 200 million
shares authorized, none issued and outstanding at
June 30, 2007 and December 31, 2006, respectively |
|
|
|
|
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|
Common stock $0.01 par value; 600 million shares
authorized, 197.5 million and 197.4 million shares
issued and 193.0 million and 191.0 million
outstanding at June 30, 2007 and December 31,
2006, respectively |
|
|
1,975 |
|
|
|
1,974 |
|
Additional paid in capital |
|
|
2,956,845 |
|
|
|
2,879,271 |
|
Retained earnings |
|
|
565,201 |
|
|
|
376,961 |
|
Accumulated other comprehensive earnings |
|
|
76,449 |
|
|
|
45,009 |
|
Treasury stock $0.01 par value; 4.5 million and
6.4 million shares at June 30, 2007 and December
31, 2006, respectively |
|
|
(160,451 |
) |
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|
(160,471 |
) |
|
|
|
|
|
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Total stockholders equity |
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|
3,440,019 |
|
|
|
3,142,744 |
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|
|
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|
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Total liabilities and stockholders equity |
|
$ |
7,795,216 |
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|
$ |
7,630,560 |
|
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|
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|
|
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See accompanying notes to unaudited consolidated financial statements.
3
FIDELITY NATIONAL INFORMATION SERVICES, INC.
AND SUBSIDIARIES
Consolidated Statements of Earnings
(In thousands, except per share amounts)
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Three month periods ended |
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Six month periods ended |
|
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|
June 30, |
|
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June 30, |
|
|
|
2007 |
|
|
2006 |
|
|
2007 |
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|
2006 |
|
|
|
(Unaudited) |
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|
(Unaudited) |
|
Processing and services revenues,
including $42.4 million and $36.8 million of
revenues from related parties for the three
month periods and $83.6 million and $69.6
million of revenues from related parties for
the six month periods ended June 30, 2007
and 2006, respectively |
|
$ |
1,176,238 |
|
|
$ |
1,021,946 |
|
|
$ |
2,300,304 |
|
|
$ |
1,922,882 |
|
Cost of revenues, including related party
expenses of $0.5 million and $1.1 million in
the three month periods and $1.1 million and
$1.8 million for the six month periods ended
June 30, 2007 and 2006, respectively |
|
|
842,946 |
|
|
|
719,718 |
|
|
|
1,656,262 |
|
|
|
1,342,055 |
|
|
|
|
|
|
|
|
|
|
|
|
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|
Gross profit |
|
|
333,292 |
|
|
|
302,228 |
|
|
|
644,042 |
|
|
|
580,827 |
|
|
|
|
|
|
|
|
|
|
|
|
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Selling, general, and administrative
expenses, net of expense reimbursement from
related parties of $2.9 million and $1.4
million in the three month periods and $4.2
million and $1.5 million for the six month
periods ended June 30, 2007 and 2006,
respectively |
|
|
125,770 |
|
|
|
125,866 |
|
|
|
245,253 |
|
|
|
271,595 |
|
Research and development costs |
|
|
23,588 |
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|
|
23,646 |
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|
|
50,697 |
|
|
|
51,706 |
|
|
|
|
|
|
|
|
|
|
|
|
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|
Operating income |
|
|
183,934 |
|
|
|
152,716 |
|
|
|
348,092 |
|
|
|
257,526 |
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|
|
|
|
|
|
|
|
|
|
|
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Other income (expense): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
|
578 |
|
|
|
1,533 |
|
|
|
1,267 |
|
|
|
3,424 |
|
Interest expense |
|
|
(42,991 |
) |
|
|
(49,033 |
) |
|
|
(115,106 |
) |
|
|
(92,301 |
) |
Gain on sale of Covansys stock |
|
|
92,044 |
|
|
|
|
|
|
|
92,044 |
|
|
|
|
|
Other income (expense), net |
|
|
812 |
|
|
|
866 |
|
|
|
1,480 |
|
|
|
(1,244 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense) |
|
|
50,443 |
|
|
|
(46,634 |
) |
|
|
(20,315 |
) |
|
|
(90,121 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings before income
taxes, equity in earnings
of unconsolidated entities
and minority interest |
|
|
234,377 |
|
|
|
106,082 |
|
|
|
327,777 |
|
|
|
167,405 |
|
Provision for income taxes |
|
|
86,533 |
|
|
|
40,629 |
|
|
|
121,278 |
|
|
|
64,116 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings before equity in
earnings of unconsolidated
entities and minority
interest |
|
|
147,844 |
|
|
|
65,453 |
|
|
|
206,499 |
|
|
|
103,289 |
|
Equity in earnings of unconsolidated entities |
|
|
736 |
|
|
|
259 |
|
|
|
1,672 |
|
|
|
2,092 |
|
Minority interest |
|
|
576 |
|
|
|
(317 |
) |
|
|
664 |
|
|
|
(6 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings |
|
$ |
148,004 |
|
|
$ |
66,029 |
|
|
$ |
207,507 |
|
|
$ |
105,387 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings per share basic |
|
$ |
0.77 |
|
|
$ |
0.34 |
|
|
$ |
1.08 |
|
|
$ |
0.58 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding basic |
|
|
192,743 |
|
|
|
192,224 |
|
|
|
192,323 |
|
|
|
181,168 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings per share diluted |
|
$ |
0.75 |
|
|
$ |
0.34 |
|
|
$ |
1.06 |
|
|
$ |
0.57 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding diluted |
|
|
196,977 |
|
|
|
195,374 |
|
|
|
196,395 |
|
|
|
184,242 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to unaudited consolidated financial statements.
4
FIDELITY NATIONAL INFORMATION SERVICES, INC.
AND SUBSIDIARIES
Consolidated Statements of Comprehensive Earnings
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three month periods |
|
|
Six month periods |
|
|
|
ended June 30, |
|
|
ended June 30, |
|
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
|
|
(Unaudited) |
|
|
(Unaudited) |
|
Net earnings |
|
$ |
148,004 |
|
|
$ |
66,029 |
|
|
$ |
207,507 |
|
|
$ |
105,387 |
|
Other comprehensive earnings: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gain (loss) on Covansys
warrants(1) |
|
|
7,369 |
|
|
|
(8,742 |
) |
|
|
7,647 |
|
|
|
(1,225 |
) |
Unrealized gain on interest rate swaps(2) |
|
|
5,211 |
|
|
|
955 |
|
|
|
4,069 |
|
|
|
3,240 |
|
Unrealized loss on other investments |
|
|
(69 |
) |
|
|
|
|
|
|
(46 |
) |
|
|
|
|
Unrealized gain on foreign currency
translation |
|
|
15,913 |
|
|
|
13,895 |
|
|
|
19,770 |
|
|
|
15,133 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive earnings |
|
|
28,424 |
|
|
|
6,108 |
|
|
|
31,440 |
|
|
|
17,148 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive earnings |
|
$ |
176,428 |
|
|
$ |
72,137 |
|
|
$ |
238,947 |
|
|
$ |
122,535 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Net of income tax expense (benefit) of $4.7 million and $(5.4) million for the three month
periods and $4.8 million and $(0.7) million for the six month periods ended June 30, 2007 and
2006, respectively. |
|
(2) |
|
Net of income tax expense of $3.2 million and $0.6 million for the three month periods and
$2.5 million and $2.0 million for the six month periods ended June 30, 2007 and 2006,
respectively. |
See accompanying notes to unaudited consolidated financial statements.
5
FIDELITY NATIONAL INFORMATION SERVICES, INC.
AND SUBSIDIARIES
Consolidated Statement of Stockholders Equity
(In thousands)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional |
|
|
|
|
|
|
Other |
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
Common |
|
|
Common |
|
|
Paid in |
|
|
Retained |
|
|
Comprehensive |
|
|
Treasury |
|
|
Treasury |
|
|
Stockholders |
|
|
|
Shares |
|
|
Stock |
|
|
Capital |
|
|
Earnings |
|
|
Earnings |
|
|
Shares |
|
|
Stock |
|
|
Equity |
|
Balances, December 31, 2006 |
|
|
197,427 |
|
|
$ |
1,974 |
|
|
$ |
2,879,271 |
|
|
$ |
376,961 |
|
|
$ |
45,009 |
|
|
|
(6,436 |
) |
|
$ |
(160,471 |
) |
|
$ |
3,142,744 |
|
Net earnings |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
207,507 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
207,507 |
|
Dividends paid |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(19,267 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(19,267 |
) |
Exercise of stock options |
|
|
|
|
|
|
|
|
|
|
43,174 |
|
|
|
|
|
|
|
|
|
|
|
1,953 |
|
|
|
20 |
|
|
|
43,194 |
|
Tax benefit associated
with exercise
of stock options |
|
|
|
|
|
|
|
|
|
|
11,161 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,161 |
|
Stock-based compensation |
|
|
|
|
|
|
|
|
|
|
17,240 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17,240 |
|
Espiel, Inc. acquisition |
|
|
119 |
|
|
|
1 |
|
|
|
5,999 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,000 |
|
Unrealized gain on
investments and
derivatives, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,670 |
|
|
|
|
|
|
|
|
|
|
|
11,670 |
|
Unrealized gain on foreign
currency translation, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19,770 |
|
|
|
|
|
|
|
|
|
|
|
19,770 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances, June 30, 2007 |
|
|
197,546 |
|
|
$ |
1,975 |
|
|
$ |
2,956,845 |
|
|
$ |
565,201 |
|
|
$ |
76,449 |
|
|
|
(4,483 |
) |
|
$ |
(160,451 |
) |
|
$ |
3,440,019 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to unaudited consolidated financial statements.
6
FIDELITY NATIONAL INFORMATION SERVICES, INC.
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
Six month periods ended |
|
|
|
June 30, |
|
|
|
2007 |
|
|
2006 |
|
|
|
(Unaudited) |
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
Net earnings |
|
$ |
207,507 |
|
|
$ |
105,387 |
|
Adjustment to reconcile net earnings to net cash provided by operating
activities: |
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
224,504 |
|
|
|
207,169 |
|
Gain on sale of Covansys stock and other assets |
|
|
(92,044 |
) |
|
|
(1,244 |
) |
Amortization of debt issuance costs |
|
|
28,436 |
|
|
|
2,496 |
|
Stock-based compensation |
|
|
17,240 |
|
|
|
32,788 |
|
Deferred income taxes |
|
|
3,551 |
|
|
|
(33,065 |
) |
Equity in earnings of unconsolidated entities |
|
|
(1,672 |
) |
|
|
(2,092 |
) |
Minority interest |
|
|
664 |
|
|
|
(6 |
) |
Changes in assets and liabilities, net of effects from acquisitions: |
|
|
|
|
|
|
|
|
Net (increase) decrease in trade receivables |
|
|
(119,223 |
) |
|
|
78,347 |
|
Net increase in prepaid expenses and other assets |
|
|
(45,890 |
) |
|
|
(41,707 |
) |
Net increase in deferred contract costs |
|
|
(25,741 |
) |
|
|
(73,894 |
) |
Net increase in deferred revenue |
|
|
4,389 |
|
|
|
13,782 |
|
Net increase (decrease) in accounts payable, accrued liabilities,
and other liabilities |
|
|
41,366 |
|
|
|
(64,601 |
) |
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
243,087 |
|
|
|
223,360 |
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
Additions to property and equipment |
|
|
(60,202 |
) |
|
|
(55,898 |
) |
Additions to capitalized software |
|
|
(93,808 |
) |
|
|
(93,522 |
) |
Cash received from sale of Covansys stock |
|
|
136,338 |
|
|
|
|
|
Acquisitions, net of cash acquired |
|
|
(65,750 |
) |
|
|
122,285 |
|
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(83,422 |
) |
|
|
(27,135 |
) |
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
Borrowings |
|
|
2,700,300 |
|
|
|
208,000 |
|
Debt service payments |
|
|
(2,874,198 |
) |
|
|
(352,776 |
) |
Capitalized debt issuance costs |
|
|
(12,577 |
) |
|
|
(5,059 |
) |
Dividends paid |
|
|
(19,267 |
) |
|
|
(19,156 |
) |
Stock options exercised |
|
|
43,194 |
|
|
|
37,463 |
|
Income tax benefit from exercise of stock options |
|
|
11,161 |
|
|
|
8,314 |
|
Treasury stock purchases |
|
|
|
|
|
|
(65,043 |
) |
Net contribution from FNF |
|
|
|
|
|
|
1,396 |
|
|
|
|
|
|
|
|
Net cash used in financing activities |
|
|
(151,387 |
) |
|
|
(186,861 |
) |
|
|
|
|
|
|
|
Effect of foreign currency exchange rates on cash |
|
|
859 |
|
|
|
1,178 |
|
Net increase in cash and cash equivalents |
|
|
9,137 |
|
|
|
10,542 |
|
Cash and cash equivalents, beginning of period |
|
|
211,753 |
|
|
|
133,152 |
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period |
|
$ |
220,890 |
|
|
$ |
143,694 |
|
|
|
|
|
|
|
|
Cash paid for interest |
|
$ |
92,208 |
|
|
$ |
91,908 |
|
|
|
|
|
|
|
|
Cash paid for taxes |
|
$ |
55,455 |
|
|
$ |
42,895 |
|
|
|
|
|
|
|
|
See accompanying notes to unaudited consolidated financial statements.
7
FIDELITY NATIONAL INFORMATION SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Unless stated otherwise or the context otherwise requires, all references in this Form 10-Q to
the registrant, us, we, our, the Company or FIS are to Fidelity National Information
Services, Inc., a Georgia corporation formerly known as Certegy Inc., and its subsidiaries since
the Certegy merger described in Note 5 and to Fidelity National Information Services, Inc., a
Delaware corporation, and its subsidiaries, prior to the Certegy merger; all references to
Certegy are to Certegy Inc., and its subsidiaries, prior to the Certegy merger described in Note
5; all references to Old FNF are to Fidelity National Financial, Inc., a Delaware corporation
that owned a majority of our shares through November 9, 2006; and all references to FNF are to
Fidelity National Financial, Inc. (formerly known as Fidelity National Title Group, Inc.), formerly
a subsidiary of Old FNF but now an independent company that remains a related entity from an
accounting perspective.
(1) Basis of Presentation
The unaudited financial information included in this report includes the accounts of Fidelity
National Information Services, Inc. and its subsidiaries prepared in accordance with generally
accepted accounting principles and the instructions to Form 10-Q and Article 10 of Regulation S-X.
All adjustments considered necessary for a fair presentation have been included. This report should
be read in conjunction with the Companys Annual Report on Form 10-K for the year ended December
31, 2006.
In the Form 10-K for the year ended December 31, 2006, the Company improperly presented the
impact of adopting Statement of Financial Accounting Standards (SFAS) No. 158, Accounting for
Defined Benefit Pension and Other Postretirement Plans (SFAS 158) in the Statement of
Comprehensive Earnings for 2006. The Company included the $6.9 million ($4.3 million, net of tax)
impact of adopting SFAS 158 with the minimum pension liability adjustment in other comprehensive
earnings for the year ended December 31, 2006. If the Company had properly excluded the SFAS 158
adjustment, the resulting amount of other comprehensive earnings would have been $49.2 million, net
of tax. The Company will correct the 2006 amount reported in the Statement of Comprehensive
Earnings in the Form 10-K for the year ended December 31, 2007. The correction will have no impact
on the Statement of Stockholders Equity for the year ended December 31, 2006.
FIS is a leading provider of technology solutions, processing services, and information-based
services to the financial services industry. On February 1, 2006, the Company completed a merger
with Certegy (the Certegy Merger) (Note 5) which was accounted for as a reverse acquisition and
purchase accounting was applied to the acquired assets and assumed liabilities of Certegy. In form,
Certegy was the legal acquirer in the Certegy Merger and the continuing registrant for SEC
reporting purposes. However, due to the majority ownership in the combined entity held by FIS
shareholders, FIS was designated the acquirer for accounting purposes and, effective on the Certegy
Merger date, the historical financial statements of FIS became the historical financial statements
of the continuing registrant for all periods prior to the Certegy Merger. The results of operations
of Certegy are only included in these historical financial statements for periods subsequent to the
Certegy Merger. Immediately after the Certegy Merger, the name of the SEC registrant was changed to
Fidelity National Information Services, Inc.
Shortly after consummating the Certegy Merger, the Company implemented a new organizational
structure, which resulted in the formation of new operating segments beginning with the reporting
of results for the first quarter of 2006 (see Note 11). Effective as of February 1, 2006, the
Companys reportable segments are Transaction Processing Services, or TPS, and Lender Processing
Services, or LPS.
|
|
|
Transaction Processing Services. This segment focuses on serving the processing and
risk management needs of financial institutions and retailers. The primary software
applications function as the underlying infrastructure of a financial institutions
processing environment. These applications include core bank processing software, which
banks use to maintain the primary records of their customer accounts. The Company also
provides a number of complementary applications and services that interact directly with
the core processing applications, including applications that facilitate interactions
between financial institution customers and their clients. The Company offers applications
and services through a range of delivery and service models, including on-site outsourcing
and remote processing arrangements, as well as on a licensed software basis for
installation on customer-owned and operated systems. This segment also includes card issuer
services, which enable banks, credit unions, and others to issue VISA and MasterCard credit
and debit cards, private label cards, and other electronic payment cards for use by both
consumer and business accounts. In addition the Company provides check guarantee and
verification services to retailers. |
8
FIDELITY NATIONAL INFORMATION SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Continued
|
|
|
Lender Processing Services. This segment offers core mortgage processing software,
which banks use to process and service mortgage loans, as well as customized outsourced
business processes and information solutions primarily to national lenders and loan
servicers. These processes include centralized, customized title agency and closing
services offered to first mortgage, refinance, home equity and sub-prime lenders. In
addition, this segment provides default management services to national lenders and loan
servicers, allowing customers to outsource the business processes necessary to take a loan
and the underlying real estate securing the loan through the default and foreclosure
process. This segments information solutions include property data and real estate-related
services. Included in these services are appraisal and valuation services, property records
information, real estate tax services, and borrower credit and flood zone information. |
The Company also has a corporate segment that consists of the corporate overhead and other
operations that are not included in the other segments.
(2) Combination with Old FNF
On June 25, 2006, the Company entered into an agreement and plan of merger (the FNF Merger
Agreement) with Old FNF (amended September 18, 2006) (the FNF Merger). The FNF Merger was one
step in a plan that eliminated Old FNFs holding company structure and majority ownership of FIS.
In connection with this plan, Old FNF also entered into a securities exchange and distribution
agreement (the SEDA) with its subsidiary Fidelity National Title Group, Inc. (FNT). Under the
SEDA, Old FNF agreed that, prior to the merger, Old FNF would transfer substantially all its assets
and liabilities to FNT, in exchange for shares of FNT common stock. Old FNF then would spin-off all
shares of FNT stock it held to the stockholders of Old FNF in a tax-free distribution. Pursuant to
the FNF Merger Agreement, on November 9, 2006 Old FNF merged with and into FIS, with FIS continuing
as the surviving corporation. In consideration for the FNF Merger, Old FNF stockholders received an
aggregate of 96,521,877 shares of FIS stock for their Old FNF shares. In addition, in connection
with the FNF Merger, FIS issued options to purchase FIS common stock and shares of FIS restricted
stock in exchange for Old FNF options and restricted stock outstanding at the time of the FNF
Merger. The FNF Merger followed the completion, on October 24, 2006, of FNTs acquisition under the
SEDA of substantially all of the assets and liabilities of Old FNF (other than Old FNFs interests
in FIS and in FNF Capital Leasing, Inc., a small subsidiary which merged into FIS in a separate
transaction) in exchange for 45,265,956 shares of FNTs Class A common stock, and Old FNFs
subsequent spin-off of FNT shares (the FNT Distribution). Pursuant to the SEDA and after the
completion of all of the transactions, FNT was renamed Fidelity National Financial, Inc. (FNF)
and now trades under the symbol FNF. Old FNF Chairman and CEO William P. Foley, II, assumed a
similar position in FNF and now serves as Executive Chairman of FIS, and other key members of Old
FNF senior management continued their involvement in both FNF and FIS in executive capacities.
U.S. generally accepted accounting principles require that one of the two parties to the FNF
Merger be designated as the acquirer for accounting purposes. However, Financial Accounting
Standards Board Technical Bulletin 85-5, Issues Relating to Accounting for Business Combinations
provides that if a transaction lacks substance, it is not a purchase event and should be accounted
for based on existing carrying amounts. In the FNF Merger, the minority interest of FIS has not
changed and the only assets and liabilities of the combined entity after the exchange are those of
FIS prior to the exchange. Because a change in ownership of the minority interest did not take
place, the FNF Merger has been accounted for based on the carrying amounts of FISs assets and
liabilities.
(3) Transactions with Related Parties
The Company has historically conducted business with Old FNF and its subsidiaries, including
FNF. In March 2005, in connection with the recapitalization of and sale of a minority equity
interest in the Company, FIS entered into various agreements with Old FNF under which it has
continued to provide title agency services, title plant management, and IT services. Further, the
Company also entered into service agreements with Old FNF under which Old FNF continued to provide
corporate services. In September 2005, when FNT was formed and the title insurance business was
consolidated under FNT, many of these agreements were amended and restated to take into account the
services that would be performed for and by FNT rather than Old FNF. On February 1, 2006, in
connection with the closing of the Certegy Merger, many of these agreements were further amended
and restated to
9
FIDELITY NATIONAL INFORMATION SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Continued
reflect changes in the parties relationships. Certain of these agreements were
further amended or terminated in
connection with the FNF Merger and related transactions. A summary of these agreements in
effect through June 30, 2007 is as follows:
|
|
|
Agreement to provide data processing services. This agreement governs the revenues to
be earned by the Company for providing IT support services and software, primarily
infrastructure support and data center management, to FNF and its subsidiaries. Subject to
certain early termination provisions (including the payment of minimum monthly service and
termination fees), this agreement has an initial term of five years from February 2006 with
an option to renew for one or two additional years. |
|
|
|
|
Agreements to provide title plant information, maintenance and management. These
agreements govern the fee structure under which the Company is paid for maintaining,
managing and updating title plants owned by FNFs title underwriters in certain parts of
the country. The title plant maintenance agreement requires, among other things, that the
Company gather updated property information, organize it, input it into one of several
systems, maintain or obtain the use of necessary software and hardware to store, access and
deliver the data, sell and deliver the data to customers and provide various forms of
customer support. The Company sells property information to title underwriters which are
subsidiaries of FNF as well as to various unaffiliated customers. The Company pays FNF a
royalty fee of 2.5% to 3.75% of the revenues received. In the case of the maintenance
agreement, the Company is responsible for the costs of keeping the title plant assets
current and functioning, and, in return, receives the revenue generated by those assets.
Subject to certain early termination provisions for cause, each of these agreements may be
terminated upon five years prior written notice, which notice may not be given until after
the fifth anniversary of the effective date of the agreement in May 2005 (thus effectively
resulting in a minimum ten year term and a rolling one-year term thereafter) . The Company
announced the sale of the subsidiary providing these services to FNF subsequent to the end
of the quarter. See Note 14 of the Notes to Consolidated Financial Statements for a
description of the sale agreement. |
|
|
|
|
Agreements to provide software development and services. These agreements govern the
fee structure under which the Company is paid for providing software development and
services to FNF which consist of developing software for use in the title operations of
FNF. |
|
|
|
|
Arrangements to provide other real estate related services. Under these arrangements
the Company is paid for providing other real estate related services to FNF, which consist
primarily of data services required by the title insurance operations. |
|
|
|
|
Agreements by FNF to provide corporate services to the Company. Through November 9,
2006, these agreements provided for FNF to provide general management, accounting,
treasury, tax, finance, payroll, human resources, employee benefits, internal audit,
mergers and acquisitions, and other corporate and administrative support to the Company.
Since November 9, 2006, these charges only relate to certain less significant activities
performed or recorded by FNF on behalf of the Company. The pricing of these services is at
cost for services which are either directly attributable to the Company, or in certain
circumstances, an allocation of the Companys share of the total costs incurred by FNF in
providing such services based on estimates that FNF and the Company believe to be
reasonable. |
|
|
|
|
Licensing, leasing, cost sharing and other agreements. These agreements provide for the
reimbursement of certain amounts from FNF or its subsidiaries related to various
miscellaneous licensing, leasing, and cost sharing agreements, as well as the payment of
certain amounts by the Company to FNF or its subsidiaries in connection with the Companys
use of certain intellectual property or other assets of or services by FNF. |
|
|
|
|
Agreements to provide title agency services. These agreements allow the Company to
provide services to existing customers through loan facilitation transactions, primarily
with large national lenders. The arrangement involves the Company providing title agency
services which result in the issuance of title policies on behalf of title insurance
underwriters owned by FNF and its subsidiaries. Subject to certain early termination
provisions for cause, each of these agreements may be terminated upon five years prior
written notice, which notice may not be given until after the fifth anniversary of the
effective date of each agreement, |
10
FIDELITY NATIONAL INFORMATION SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Continued
|
|
which ranges from July 2004 through September 2006 (thus
effectively resulting in a minimum ten year term
and a rolling one-year term thereafter). The LPS segment includes revenues from unaffiliated
third parties of $36.1 million and $18.2 million for the three months ended, and $68.4
million and $36.9 million for the six months ended June 30, 2007 and 2006, respectively,
representing commissions on title insurance policies placed by the Company on behalf of title
insurance subsidiaries of FNF. These commissions in aggregate are equal to approximately 89%
of the total title premium from title policies that the Company places with subsidiaries of
FNF. The Company also performs similar functions in connection with trustee sale guarantees,
a form of title insurance that subsidiaries of FNF issue as part of the foreclosure process
on a defaulted loan. |
A detail of related party items included in revenues and expenses, for the three month periods
ending June 30, 2007 and 2006, and for the six month periods ending June 30, 2007 and 2006, is as
follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three month periods ended |
|
|
Six month periods ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
Data processing services revenue |
|
$ |
12.7 |
|
|
$ |
17.7 |
|
|
$ |
24.6 |
|
|
$ |
34.6 |
|
Title plant information,
maintenance, and management revenue |
|
|
10.4 |
|
|
|
6.2 |
|
|
|
23.1 |
|
|
|
11.8 |
|
Software and services revenue |
|
|
15.3 |
|
|
|
9.9 |
|
|
|
28.6 |
|
|
|
17.3 |
|
Other real-estate related services |
|
|
4.0 |
|
|
|
3.0 |
|
|
|
7.3 |
|
|
|
5.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
$ |
42.4 |
|
|
$ |
36.8 |
|
|
$ |
83.6 |
|
|
$ |
69.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three month periods ended |
|
|
Six month periods ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
Title plant
information,
maintenance, and
management expense |
|
$ |
0.5 |
|
|
$ |
1.1 |
|
|
$ |
1.1 |
|
|
$ |
1.8 |
|
Corporate services |
|
|
0.6 |
|
|
|
2.1 |
|
|
|
1.5 |
|
|
|
4.5 |
|
Licensing, leasing,
cost sharing, and
other services |
|
|
(3.5 |
) |
|
|
(3.5 |
) |
|
|
(5.7 |
) |
|
|
(6.0 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses |
|
$ |
(2.4 |
) |
|
$ |
(0.3 |
) |
|
$ |
(3.1 |
) |
|
$ |
0.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company believes the amounts earned from or charged by FNF to the Company under each of
the foregoing service arrangements are fair and reasonable. Although the approximate 88% aggregate
commission rate on title insurance policies was set without negotiation, the Company believes it is
consistent with the blended rate that would be available to a third party title agent given the
amount and the geographic distribution of the business produced and the low risk of loss profile of
the business placed. In connection with title plant management, the Company charges FNF title
insurers for title information at approximately the same rates the Company and other similar
vendors charge unaffiliated title insurers. The Companys information technology infrastructure
support and data center management services to FNF are priced within the range of prices the
Company offers to third parties. These transactions between the Company and FNF are subject to
review for performance and pricing.
The Company also provides data processing services to Sedgwick CMS, Inc. (Sedgwick), a
company in which FNF holds an approximate 40% equity interest. The Company recorded $10.3
million and $18.6 million in revenue relating to this arrangement with Sedgwick during the three
and six months ended June 30, 2007, respectively. The Company received no revenue from Sedgwick for
the three or six months ended June 30, 2006.
Other related party transactions:
Contribution of National New York
During the second quarter of 2006, Old FNF contributed the stock of National Title Insurance
of New York, Inc. (National New York), a title insurance company, to the Company. This
transaction was reflected as a contribution of capital from Old FNF in the amount of Old FNFs
historical basis in National New York of approximately $10.7 million.
11
FIDELITY NATIONAL INFORMATION SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Continued
Merger with FNF Capital
On October 26, 2006, the Company completed a merger with FNF Capital, Inc. (FNF Capital), a
leasing
subsidiary of Old FNF. The Company issued 279,000 shares of the Companys common stock to Old
FNF in exchange for a majority ownership in FNF Capital. The transaction was recorded at Old FNFs
historical basis in FNF Capital of approximately $2.3 million and the Company purchased the
minority ownership shortly thereafter for $3.8 million in cash. Through the merger, the Company
assumed a note payable to Old FNF of $13.9 million, and the Company recorded interest expense
related to this note of $0.2 million and $0.4 million during the three and six months ended June
30, 2007, respectively.
The contribution of National New York and the merger with FNF Capital were completed between
entities under common control and their results of operations and account balances have been
included in the Companys results of operations and statement of financial position since the dates
of the relevant transactions. Had the Company included the results of operations for all periods
presented in the Consolidated Financial Statements, net earnings would have increased $0.6 million
and $0.9 million during the three and six months ended June 30, 2006, respectively.
Investment by FNF in Fidelity National Real Estate Solutions, Inc.
On December 31, 2006, FNF contributed $52.5 million to Fidelity National Real Estate
Solutions, Inc. (FNRES), a subsidiary of the Company, for approximately 61% of the outstanding
shares of FNRES. As a result, since December 31, 2006, the Company no longer consolidates FNRES,
but has recorded its remaining 39% interest as an equity investment in the amount of $31.8 million
and $33.5 million as of June 30, 2007 and December 31, 2006, respectively. The Company recorded
equity losses (net of tax), from its investment in FNRES, of $0.6 million and $1.1 million during
the three and six months ended June 30, 2007, respectively.
Master Services Agreement with Covansys
In 2004, the Company entered into a master service provider agreement (the Original
Agreement) with Covansys, an entity in which the Company held an equity interest until July 2,
2007 (see Note 6). On August 2, 2007, the agreement was amended (the Amended Agreement) to
require the Company to engage a specified number of full time employees of Covansys to perform
services on the Companys behalf each business day through 2008, or to pay the monetary equivalent
if there is a shortfall. The Company does not believe any future material penalties will result
from lack of performance under the Amended Agreement. The Company is no longer obligated, under the
Original Agreement, to purchase $150 million in services over a five year period expiring June 30,
2009. Under the Original Agreement, the Company spent $9.8 million and $9.8 million for the three
month periods, and $20.3 million and $15.9 million for the six month periods ended June 30, 2007
and June 30, 2006, respectively, for services provided by Covansys and its subsidiaries.
Transactions with ABN AMRO Real and Banco Bradesco S.A.
The Company recorded revenues of $15.5 million and $11.3 million for the three month periods
and $28.6 million and $20.7 million for the six month periods ended June 30, 2007 and 2006,
respectively, from ABN AMRO Real (ABN). The Company recorded revenues of $12.0 million and $5.4
million for the three month periods and $20.5 million and $9.9 million for the six month periods
ended June 30, 2007 and 2006, respectively, from Banco Bradesco (Bradesco). Both ABN and
Bradesco are venture partners in the Companys Brazilian card business.
(4) Unaudited Net Earnings per Share
The basic weighted average shares and common stock equivalents for the three and six months
ended June 30, 2007 and 2006 are computed in accordance with SFAS 128, Earnings per Share, using
the treasury stock method.
12
FIDELITY NATIONAL INFORMATION SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Continued
The following table summarizes the earnings per share for the three and six month periods
ending June 30, 2007 and June 30, 2006 (in thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three month periods ended |
|
|
Six month periods ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
Net earnings |
|
$ |
148,004 |
|
|
$ |
66,029 |
|
|
$ |
207,507 |
|
|
$ |
105,387 |
|
Weighted average shares outstanding basic |
|
|
192,743 |
|
|
|
192,224 |
|
|
|
192,323 |
|
|
|
181,168 |
|
Plus: Common stock equivalent shares assumed
from conversion of options |
|
|
4,234 |
|
|
|
3,150 |
|
|
|
4,072 |
|
|
|
3,074 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding diluted |
|
|
196,977 |
|
|
|
195,374 |
|
|
|
196,395 |
|
|
|
184,242 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net earnings per share |
|
$ |
0.77 |
|
|
$ |
0.34 |
|
|
$ |
1.08 |
|
|
$ |
0.58 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net earnings per share |
|
$ |
0.75 |
|
|
$ |
0.34 |
|
|
$ |
1.06 |
|
|
$ |
0.57 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The basic weighted average shares and common stock equivalents for the six month period ended
June 30, 2006 only include the shares and options that were previously outstanding at Certegy from
February 1, 2006 through June 30, 2006. If these shares and options had been outstanding for the
entire six months of 2006, basic weighted average shares outstanding would have been approximately
192.0 million, common stock equivalents would have been 3.2 million and weighted average shares on
a diluted basis would have been 195.2 million.
Options to purchase shares of the Companys common stock of approximately 2.7 million and 1.8
million for the three month periods and 3.8 million and 1.8 million for the six month periods ended
June 30, 2007 and 2006, respectively, were not included in the computation of diluted earnings per
share because they were antidilutive.
(5) Acquisitions
The results of operations and financial position of the entities acquired during the six month
period ended June 30, 2007 and during 2006 are included in the Consolidated Financial Statements
from and after the date of acquisition. The purchase price of each acquisition was allocated to the
assets acquired and liabilities assumed with any excess cost over fair value being allocated to
goodwill. Third party valuations are obtained for significant acquisitions.
Certegy
On September 14, 2005, the Company entered into a definitive merger agreement with Certegy
under which the Company and Certegy combined operations to form a single publicly traded company
called Fidelity National Information Services, Inc. (NYSE:FIS). Certegy was a payment processing
company headquartered in St. Petersburg, Florida. On January 26, 2006, Certegys shareholders
approved the Certegy Merger, which was subsequently consummated on February 1, 2006.
Under the terms of the Certegy Merger agreement, the Company was merged into a wholly owned
subsidiary of Certegy in a tax-free merger, and all of the Companys outstanding stock was
converted into Certegy common stock. As a result of the Certegy Merger:
|
|
|
The Companys pre-merger shareholders owned approximately 67.4% of the Companys
outstanding common stock immediately after the Certegy Merger, while Certegys pre-merger
shareholders owned approximately 32.6%; |
|
|
|
|
Immediately after the Certegy Merger, Old FNF and its subsidiaries owned approximately
51.0% of the Companys outstanding common stock; and |
|
|
|
|
The Companys board of directors was reconstituted so that a majority of the board
consisted of directors designated by the Companys shareholders. |
In connection with the Certegy Merger, Certegy amended its articles of incorporation to
increase the number of authorized shares of capital stock from 400 million shares to 800 million
shares, with 600 million shares being designated as common stock and 200 million shares being
designated as preferred stock. Additionally, Certegy amended its stock incentive plan to increase
the total number of shares of common stock available for issuance under the current stock incentive
plan by an additional 6 million shares, and to increase the limits on the number of options,
restricted shares, and other awards that may be granted to any individual in any calendar year.
These changes were approved by Certegys shareholders on January 26, 2006.
13
FIDELITY NATIONAL INFORMATION SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Continued
As part of the Certegy Merger transaction, Certegy declared a $3.75 per share special cash
dividend that was paid to Certegys pre-merger shareholders. This dividend, totaling $236.6
million, was paid by Certegy at the
consummation of the Certegy Merger.
Generally accepted accounting principles in the U.S. require that one of the two companies in
the transaction be designated as the acquirer for accounting purposes. The Company has been
designated as the accounting acquirer because immediately after the Certegy Merger its shareholders
held more than 50% of the common stock of the combined company. As a result, the Certegy Merger has
been accounted for as a reverse acquisition under the purchase method of accounting. Under this
accounting treatment, the Company is considered the acquiring entity and Certegy is considered the
acquired entity for financial reporting purposes. The financial statements of the combined company
after the Certegy Merger reflect the Companys financial results on a historical basis and include
the results of operations of Certegy from February 1, 2006.
The purchase price was based on the number of outstanding shares of common stock of Certegy on
February 1, 2006, the date of consummation of the Certegy Merger, valued at $33.38 per share (which
was the average of the trading price of Certegy common stock two days before and two days after the
announcement of the Certegy Merger on September 15, 2005 of $37.13, less the $3.75 per share
special dividend declared prior to closing). The purchase price also included the estimated fair
value of Certegys stock options and restricted stock units outstanding at the transaction date.
The total purchase price was as follows (in millions):
|
|
|
|
|
Value of Certegys common stock |
|
$ |
2,121.0 |
|
Value of Certegys stock options |
|
|
54.2 |
|
Estimated transaction costs |
|
|
5.9 |
|
|
|
|
|
|
|
$ |
2,181.1 |
|
|
|
|
|
The purchase price has been allocated to Certegys tangible and identifiable intangible assets
acquired and liabilities assumed based on their fair values as of February 1, 2006. Goodwill has
been recorded based on the amount that the purchase price exceeds the fair value of the net assets
acquired. The purchase price allocation is as follows (in millions):
|
|
|
|
|
Cash |
|
$ |
376.3 |
|
Trade and other receivables |
|
|
241.2 |
|
Land, buildings, and equipment |
|
|
72.4 |
|
Other assets |
|
|
136.9 |
|
Computer software |
|
|
131.6 |
|
Intangible assets |
|
|
653.5 |
|
Goodwill |
|
|
1,939.8 |
|
Liabilities assumed |
|
|
(1,370.6 |
) |
|
|
|
|
Total purchase price |
|
$ |
2,181.1 |
|
|
|
|
|
The allocation of the purchase price to intangible assets, including computer software, is
based on studies and valuations that were finalized as of September 30, 2006.
The following table summarizes the liabilities assumed in the Certegy Merger (in millions):
|
|
|
|
|
Notes payable and capital lease obligations |
|
$ |
222.8 |
|
Deferred income taxes |
|
|
210.5 |
|
Dividends payable |
|
|
236.6 |
|
Dividend bridge loan |
|
|
239.0 |
|
Liabilities associated with pension, SERP, and postretirement benefit plans |
|
|
31.1 |
|
Estimated severance payments to certain Certegy employees |
|
|
10.0 |
|
Estimated employee relocation and facility closure costs |
|
|
11.6 |
|
Other merger related |
|
|
28.5 |
|
Other operating liabilities |
|
|
380.5 |
|
|
|
|
|
|
|
$ |
1,370.6 |
|
|
|
|
|
14
FIDELITY NATIONAL INFORMATION SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Continued
In connection with the Certegy Merger, the Company announced that it will terminate and settle
the Certegy U.S. Retirement Income Plan (pension plan). The estimated impact of this settlement was
reflected in the purchase
price allocation as an increase in the pension liability, less the fair value of the pension
plan assets, based on estimates of the total cost to settle the liability through the purchase of
annuity contracts or lump sum settlements to the beneficiaries. The Company received an IRS
determination letter, dated July 26, 2007, and expects to finalize the settlement by the end of
2007. In addition to the pension plan obligation, the Company assumed liabilities for Certegys
Supplemental Executive Retirement Plan (the SERP) and Postretirement Benefit Plan. The total
liability recorded as part of the purchase price allocation related to all three plans, net of the
fair value of plan related assets, was $31.1 million.
The Company has evaluated the various lease agreements, vendor arrangements, and customer
contracts of Certegy. This evaluation has resulted in the recognition of certain liabilities
associated with exiting activities of the acquired company.
Also, the Certegy Merger triggered the performance criteria relating to performance stock
option grants made in March 2005 and these awards vested when the trading value of the Companys
stock remained above $31.27 for 45 consecutive trading days following the Certegy Merger. As a
result, the Company recorded a charge of $24.1 million in the first quarter of 2006 and recorded an
additional $0.4 million in the second quarter of 2006 relating to these options that became fully
vested on April 7, 2006.
Selected unaudited pro forma results of operations for the six month period ended June 30,
2006, assuming the Certegy Merger had occurred as of January 1, 2006, and using actual general and
administrative expenses prior to the acquisition are set forth below, together with actual results
for the six month period ended June 30, 2007, that are presented for comparative purposes (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
2006 |
Total revenues |
|
$ |
2,300,304 |
|
|
$ |
2,015,797 |
|
Net earnings |
|
$ |
207,507 |
|
|
$ |
59,156 |
|
Pro forma earnings per share basic |
|
$ |
1.08 |
|
|
$ |
0.30 |
|
Pro forma earnings per share diluted |
|
$ |
1.06 |
|
|
$ |
0.30 |
|
The June 30, 2006 pro forma results include pretax merger related costs recorded in January
2006 by Certegy of $79.7 million and a pretax charge of $24.5 million related to FIS
performance-based stock compensation.
15
FIDELITY NATIONAL INFORMATION SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Continued
Other acquisitions:
The following transactions with acquisition prices between $10 million and $100 million were
completed by the Company during the period from January 1, 2006 through June 30, 2007. Purchase
prices reflected in the table are net of cash acquired:
|
|
|
|
|
Name of Company Acquired |
|
Date Acquired |
|
Purchase Price |
FastFunds Financial Corporation
|
|
February 1, 2006
|
|
$14.0 million |
Proservvi Empreendimentos e Servicos Ltda.
|
|
July 17, 2006
|
|
$16.2 million |
Watterson Prime, LLC
|
|
November 2, 2006
|
|
$10.4 million |
Second Foundation, Inc.
|
|
February 15, 2007
|
|
$18.9 million |
Espiel, Inc. and Financial Systems Integrators, Inc.
|
|
June 8, 2007
|
|
$43.3 million |
In addition, see Note 13 of the Notes to Consolidated Financial Statements for a description
of the Companys pending acquisition of eFunds Corporation (EFD).
(6) Investment in Covansys Corporation
On September 15, 2004, Old FNF acquired 11 million shares of common stock, and warrants to
purchase 4 million additional shares of Covansys Corporation (Covansys) common stock, a publicly
traded U.S. based provider of application management and offshore outsourcing services with
India-based operations, for $121.0 million in cash. Old FNF subsequently contributed the common
stock and warrants to the Company which resulted in the Company owning approximately 29% of the
common stock of Covansys. As of the end of the second quarter, the Company owned approximately 20%
of the common stock of Covansys. The Company accounts for the investment in common stock, as of
June 30, 2007, using the equity method of accounting. The accounting for the warrants, as of June
30, 2007, is governed by the provisions of SFAS No. 115, Accounting for Certain Investments in Debt
and Equity Securities, and changes in the fair value of the warrants are recorded through equity in
other comprehensive earnings. The Company recorded equity earnings (net of tax) of $1.3 million and
$0.3 million for the three month periods and $2.7 million and $2.1 million for the six month
periods ended June 30, 2007 and 2006, respectively, from its investment in Covansys.
On April 25, 2007, the board of directors of Covansys entered into an agreement with Computer
Sciences Corporation (CSC) under which CSC agreed to acquire Covansys for $34.00 per share in an
all-cash transaction. Prior to the merger closing, the Company sold 4.1 million shares of Covansys
stock. The Company realized a gain on the sale of stock of $92.0 million during the second
quarter. The merger closed on July 3, 2007, and the Company exchanged 6.9 million shares of stock
for cash, and 4.0 million warrants for cash, per the terms of the merger agreement. The Company
realized an additional pre-tax gain of $182.4 million, which will be recorded in the third quarter
of 2007.
16
FIDELITY NATIONAL INFORMATION SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Continued
(7) Long-Term Debt
Long-term debt as of June 30, 2007 and December 31, 2006 consists of the following (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
December 31, |
|
|
|
2007 |
|
|
2006 |
|
Term Loan, unsecured, interest payable at
LIBOR plus 0.875% (6.195% at June 30, 2007),
quarterly principal amortization, maturing
January 2012 |
|
$ |
2,073,750 |
|
|
$ |
|
|
Revolving Loan, unsecured, interest payable at
LIBOR plus 0.70% (Eurocurrency Borrowings),
Fed-funds plus 0.70% (Swingline Borrowings) or
Prime plus 0.00% (Base Rate Borrowings) plus
0.175% facility fee (6.195%, 6.185% or 8.425%
respectively at June 30, 2007), maturing January
2012. Total of $469.5 million unused as of June
30, 2007 |
|
|
430,500 |
|
|
|
|
|
Term Loan B Facility, repaid January 18, 2007 |
|
|
|
|
|
|
1,730,000 |
|
Term Loan A Facility, repaid January 18, 2007 |
|
|
|
|
|
|
786,000 |
|
Unsecured notes, net of discount, interest
payable semiannually at 4.75%, due September 2008 |
|
|
197,040 |
|
|
|
195,893 |
|
Revolving credit facility, repaid January 18, 2007 |
|
|
|
|
|
|
159,920 |
|
Other promissory notes with various interest
rates and maturities (at June 30, 2007 and
December 31, 2006 includes $94.9 million and
$89.9 million, respectively, of non-recourse debt
of Fidelity National Capital, Inc.) |
|
|
151,134 |
|
|
|
137,688 |
|
|
|
|
|
|
|
|
|
|
|
2,852,424 |
|
|
|
3,009,501 |
|
Less current portion |
|
|
(113,621 |
) |
|
|
(61,661 |
) |
|
|
|
|
|
|
|
Long-term debt, excluding current portion |
|
$ |
2,738,803 |
|
|
$ |
2,947,840 |
|
|
|
|
|
|
|
|
On January 18, 2007, the Company entered into a credit agreement with JPMorgan Chase Bank,
N.A., as Administrative Agent, Swing Line Lender, and Letter of Credit Issuer, Bank of America,
N.A., as Swing Line Lender, and other financial institutions party thereto (the Credit
Agreement). The Credit Agreement replaced the Companys prior term loans and revolver as well as a
$100 million settlement facility. As a result of the new credit agreement, the Company repaid the
old credit agreement and recorded a charge of $27.2 million to write-off unamortized capitalized
debt issuance costs. The Credit Agreement, which is unsecured, provides for a committed $2.1
billion five-year term facility denominated in U.S. Dollars (the Term Loan) and a committed $900
million revolving credit facility (the Revolving Loan) with a sublimit of $250 million for
letters of credit and a sublimit of $250 million for swing line loans, maturing on the fifth
anniversary of the closing date (the Maturity Date). The Revolving Loan is bifurcated into a $735
million multicurrency revolving credit loan (the Multicurrency Tranche) that can be denominated
in any combination of U.S. Dollars, Euro, British Pounds Sterling and Australian Dollars, and any
other foreign currency in which the relevant lenders agree to make advances and a $165 million U.S.
Dollar revolving credit loan that can be denominated only in U.S. Dollars. The swingline loans and
letters of credit are available as a sublimit under the Multicurrency Tranche. In addition, the
Credit Agreement provides for an uncommitted incremental loan facility in the maximum principal
amount of $600 million, which will be made available only upon receipt of further commitments from
lenders under the Credit Agreement sufficient to fund the amount requested by the Company.
The Term Loan balance was $2.1 billion and a total of $430.5 million was outstanding under the
Revolving Loan as of June 30, 2007. The obligations under the Credit Agreement have been jointly
and severally, unconditionally guaranteed by substantially all of the domestic subsidiaries of the
Company.
The Company may borrow, repay and re-borrow amounts under the Revolving Loan from time to time
until the maturity of the Revolving Loan. The Company must make quarterly principal payments under
the Term Loan in scheduled installments of: (a) $13.1 million per quarter from June 30, 2007
through December 31, 2008; (b) $26.3 million per quarter from March 31, 2009 through December 31,
2009; and (c) $52.5 million per quarter from March 31, 2010 through September 30, 2011, with the
remaining balance of approximately $1.5 billion payable on the Maturity Date.
In addition to the scheduled principal payments, the Term Loan is (with certain exceptions)
subject to mandatory prepayment upon issuances of debt, casualty and condemnation events, and sales
of assets. Voluntary prepayments of the Loans are generally permitted at any time without fee upon
proper notice and subject to a minimum dollar
17
FIDELITY NATIONAL INFORMATION SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Continued
requirement. Commitment reductions of the Revolving Loan are also permitted at any time
without fee upon proper notice. The Revolving Loan has no scheduled principal payments, but it will
be due and payable in full on the Maturity Date.
The outstanding balance of the Loans bears interest at a floating rate, which is at the
Companys option, either (a) the Eurocurrency (LIBOR) rate plus an applicable margin or (b) either
(i) the federal funds rate plus an applicable margin or (ii) the prime rate. The applicable margin is subject to adjustment based on a
leverage ratio (total indebtedness to EBITDA of the Company and its consolidated subsidiaries, as
further defined in the Credit Agreement). Alternatively, the Company has the ability to request the
lenders to submit competitive bids for one or more advances under the Revolving Loan (the Bid Rate
Advances).
The Credit Agreement provides procedures for lenders to submit bids for Bid Rate Advances and
for the Company to accept or reject them. The Credit Agreement contains affirmative, negative and
financial covenants customary for financings of this type, including, among other things, limits on
the creation of liens, limits on the incurrence of indebtedness, restrictions on investments and
dispositions, limitations on dividends and other restricted payments, a minimum interest coverage
ratio and a maximum leverage ratio. Upon an event of default, the Administrative Agent can
accelerate the maturity of the loan. Events of default include conditions customary for such an
agreement, including failure to pay principal and interest in a timely manner and breach of certain
covenants. The Companys management believes that the Company was in compliance with all covenants
related to the Credit Agreement at June 30, 2007.
On June 26, 2007, the Company received a commitment letter from J.P. Morgan Securities, Inc.,
JPMorgan Chase Bank, N.A., Bank of America, N.A., and Banc of America Securities, LLC, to provide a
new $1.6 billion tranche of term loans. The proceeds of the new tranche of term loans will be used to finance the EFD acquisition, and pay
related fees and expenses. On July 16, 2007 the commitment letter was
amended to add Wachovia Capital Markets, LLC, and Wachovia Bank, N.A. to the commitment parties. On
July 30, 2007, the Company also executed an amendment to its existing Credit Agreement, to
facilitate the purchase of EFD. See Note 13 of the Notes to Consolidated Financial Statements for a
description of the amendment and related EFD acquisition.
In April 2005, the Company entered into interest rate swap agreements in connection with its prior
term loans (or any replacement debt, including the Term Loan). Under these agreements, the Company
receives a LIBOR rate of interest in exchange for paying a fixed rate of approximately 4.38% until
April 2008 on $350 million of notional principal amount. In April 2007, the Company entered into a
further interest rate swap agreement. Under this agreement, the Company receives a LIBOR rate of
interest in exchange for paying a fixed rate of 4.92% until April 2010, on $850 million of notional
principal amount. The Company has designated these interest rate swaps as cash flow hedges in
accordance with SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. The
estimated fair value of these cash flow hedges results in an asset of $11.5 million and $4.9
million, as of June 30, 2007 and December 31, 2006, respectively, which is included in the
accompanying Consolidated Balance Sheets in other noncurrent assets and as a component of
accumulated other comprehensive earnings, net of deferred taxes. 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 Loan.
The Companys existing cash flow hedges are highly effective and there is no current impact on
earnings due to hedge ineffectiveness. It is the policy of the Company to execute such instruments
with credit-worthy banks and not to enter into derivative financial instruments for speculative
purposes.
18
FIDELITY NATIONAL INFORMATION SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Continued
(8) Income Taxes
The 2007 calendar year is the first year the Company is required to adopt FASB Interpretation
No. 48, Accounting for Uncertainty in Income Taxes (FIN 48). Interest and penalties on accrued
but unpaid taxes are classified in the consolidated financial statements as income tax expense.
At the beginning of 2007, the Company had approximately $13.3 million of total gross
unrecognized tax benefits. Of this total, $3.5 million (net of the federal benefit on state issues)
would favorably affect the effective tax rate. The remaining amounts, if recognized, would result
in an adjustment to goodwill. The increase in the amount of gross unrecognized tax benefits as a
result of positions taken was $0.7 million and $2.2 million for the three and six months ended June
30, 2007, respectively.
The total amount of interest expense recognized in the Consolidated Statements of Earnings for
unpaid taxes is $0.4 million ($0.3 million after tax benefit) and $0.6 million ($0.4 million after
tax benefit) for the three and six months ended June 30, 2007, respectively. The total amount of
interest and penalties recognized in the consolidated balance sheet is $1.8 million at June 30,
2007. Interest and penalties on accrued but unpaid taxes are classified in the financial statements
as income taxes.
Due to the potential expiration of various statutes of limitation in the next twelve months,
an estimated $1.4 million of gross unrecognized tax benefits may be recognized during that twelve
month period.
The Company and its subsidiaries are subject to U.S. Federal income tax as well as income tax
of multiple state and foreign jurisdictions. The Company has been audited by the Internal Revenue
Service (the IRS) over recent years and examinations for all years prior to 2006 have been closed
or the statutes have expired. The Company is currently under IRS audit for the 2006 and 2007 tax
years. Substantially all material foreign income tax return matters have been concluded through
1999. Substantially all state income tax returns have been concluded through 2002.
(9) Commitments and Contingencies
Litigation
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 matters listed below, depart from
customary litigation incidental to the business. As background to the disclosure below, please note
the following:
|
|
|
These matters raise difficult and complicated factual and legal issues and are subject
to many uncertainties and complexities. |
|
|
|
|
The Company reviews these matters on an ongoing basis and follows the provisions of
SFAS No. 5, Accounting for Contingencies (SFAS 5), when making accrual and disclosure
decisions. When assessing reasonably possible and probable outcomes, the Company bases
decisions on the assessment of the ultimate outcome following all appeals. |
The Company and certain of its employees were named as defendants in a civil lawsuit brought
by Grace & Digital Information Technology Co., Ltd. (Grace). Grace was a sales agent engaged by
Alltel Information Services, Inc. (AIS) in June of 2001. In March of 2002 (before AIS was
acquired by Fidelity National Financial, Inc.), Graces contract was terminated because Grace was
no longer providing sales agent services. In May of 2004, Grace asserted a claim for unpaid sales
commissions, and filed suit against the Company later that same year in Monterey County,
California. The case was subsequently re-filed in the United States District Court for the Middle
District of Florida in March of 2006. In the lawsuit, Grace alleged damages caused by breach of
contract, violation of the Racketeer Influenced and Corrupt Organizations (the RICO) Act and
violation of the Foreign Corrupt Practices Act (the FCPA). Graces FCPA and RICO allegations
prompted inquiries by both the Securities and Exchange Commission and the U.S. Department of
Justice. The Companys legal counsel investigated Graces
19
FIDELITY NATIONAL INFORMATION SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Continued
RICO and FCPA allegations and concluded that no violations had occurred. The Company
vigorously defended the civil lawsuit, and in March of 2007 the court dismissed the RICO claims
with prejudice and struck Graces FCPA allegations. The parties subsequently settled the remaining
breach of contract claim at court-ordered mediation in April of 2007. The Company continues to
fully cooperate with the Securities and Exchange Commission and the U.S. Department of Justice.
Employee Data Theft
On July 3, 2007, the Company announced that management of its subsidiary, Certegy Check
Services, Inc., had learned of the misappropriation of consumer information by a former employee.
The Companys investigation into this matter is still on-going. To date, after elimination of
duplicate consumer records and invalid data, the Company has determined that approximately 8.5
million consumer records were stolen. Some of these records contained only identifying information
(i.e., name, address, telephone number and in some cases, date of birth). However, approximately
5.7 million of the records included checking account information and approximately 1.5 million
included credit card information. Because the investigation is continuing, it is possible that more
records may be identified in the future. To date, the Company has seen no evidence of the stolen
information being used for anything other than marketing purposes.
Although the Company does not believe that it faces any significant liability for consumer or
financial fraud, there can be no assurance this matter will not result in fines or other charges or
adversely affect the Companys relationships with the VISA and MasterCard issuing organizations,
customers or regulators.
(10) Stock Option Plans
The Company accounts for stock-based compensation using the fair value recognition provisions
of SFAS No. 123R, Share-Based Payment effective as of January 1, 2006. Prior to January 1, 2006,
the Company accounted for stock-based compensation using the fair value recognition provisions of
SFAS No. 123, Accounting for Stock-Based Compensation, which the Company adopted on January 1, 2003
under the prospective method as permitted by SFAS No. 148, Accounting for Stock-Based Compensation
Transition and Disclosure. Under this method, stock-based employee compensation cost was
recognized from the beginning of 2003 as if the fair value method of accounting had been used to
account for all employee awards granted, modified, or settled in years beginning after December 31,
2002. The Company has provided for stock compensation expense of $8.8 million and $4.8 million for
the three month periods and $17.2 million and $32.8 million for the six month periods ended June
30, 2007 and 2006, respectively, which is included in selling, general, and administrative expenses
in the Consolidated Statements of Earnings. The six month period ended June 30, 2006 included stock
compensation expense of $24.5 million relating to the FIS performance-based options granted on
March 9, 2005 for which the performance and market criteria for vesting were met during the
quarter.
20
FIDELITY NATIONAL INFORMATION SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Continued
(11) Segment Information
Summarized financial information concerning the Companys segments is shown in the following
tables.
As of and for the three month period ended June 30, 2007 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transaction |
|
|
Lender |
|
|
|
|
|
|
|
|
|
Processing |
|
|
Processing |
|
|
Corporate |
|
|
|
|
|
|
Services |
|
|
Services |
|
|
and Other |
|
|
Total |
|
Processing and services revenues |
|
$ |
709,724 |
|
|
$ |
462,493 |
|
|
$ |
4,021 |
|
|
$ |
1,176,238 |
|
Cost of revenues |
|
|
550,691 |
|
|
|
292,255 |
|
|
|
|
|
|
|
842,946 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
159,033 |
|
|
|
170,238 |
|
|
|
4,021 |
|
|
|
333,292 |
|
Selling, general and administrative expenses |
|
|
45,989 |
|
|
|
48,110 |
|
|
|
31,671 |
|
|
|
125,770 |
|
Research and development costs |
|
|
14,905 |
|
|
|
8,683 |
|
|
|
|
|
|
|
23,588 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss) |
|
|
98,139 |
|
|
|
113,445 |
|
|
|
(27,650 |
) |
|
|
183,934 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
$ |
73,397 |
|
|
$ |
33,796 |
|
|
$ |
6,698 |
|
|
$ |
113,891 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures |
|
$ |
50,537 |
|
|
$ |
19,692 |
|
|
$ |
9,665 |
|
|
$ |
79,894 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
5,156,369 |
|
|
$ |
1,937,544 |
|
|
$ |
701,303 |
|
|
$ |
7,795,216 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill |
|
$ |
2,687,329 |
|
|
$ |
1,091,266 |
|
|
$ |
2,772 |
|
|
$ |
3,781,367 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of and for the three month period ended June 30, 2006 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transaction |
|
|
Lender |
|
|
|
|
|
|
|
|
|
Processing |
|
|
Processing |
|
|
Corporate |
|
|
|
|
|
|
Services |
|
|
Services |
|
|
and Other |
|
|
Total |
|
Processing and services revenues |
|
$ |
612,076 |
|
|
$ |
408,081 |
|
|
$ |
1,789 |
|
|
$ |
1,021,946 |
|
Cost of revenues |
|
|
474,648 |
|
|
|
245,070 |
|
|
|
|
|
|
|
719,718 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
137,428 |
|
|
|
163,011 |
|
|
|
1,789 |
|
|
|
302,228 |
|
Selling, general and administrative expenses |
|
|
51,088 |
|
|
|
50,173 |
|
|
|
24,605 |
|
|
|
125,866 |
|
Research and development costs |
|
|
15,268 |
|
|
|
8,378 |
|
|
|
|
|
|
|
23,646 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss) |
|
|
71,072 |
|
|
|
104,460 |
|
|
|
(22,816 |
) |
|
|
152,716 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
$ |
72,906 |
|
|
$ |
35,104 |
|
|
$ |
2,364 |
|
|
$ |
110,374 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures |
|
$ |
43,807 |
|
|
$ |
30,301 |
|
|
$ |
6,048 |
|
|
$ |
80,156 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
5,177,886 |
|
|
$ |
1,875,069 |
|
|
$ |
289,830 |
|
|
$ |
7,342,785 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill |
|
$ |
2,615,398 |
|
|
$ |
1,082,502 |
|
|
$ |
|
|
|
$ |
3,697,900 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the six month period ended June 30, 2007 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transaction |
|
|
Lender |
|
|
|
|
|
|
|
|
|
Processing |
|
|
Processing |
|
|
Corporate |
|
|
|
|
|
|
Services |
|
|
Services |
|
|
and Other |
|
|
Total |
|
Processing and services revenues |
|
$ |
1,390,269 |
|
|
$ |
902,882 |
|
|
$ |
7,153 |
|
|
$ |
2,300,304 |
|
Cost of revenues |
|
|
1,080,742 |
|
|
|
575,520 |
|
|
|
|
|
|
|
1,656,262 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
309,527 |
|
|
|
327,362 |
|
|
|
7,153 |
|
|
|
644,042 |
|
Selling, general and administrative expenses |
|
|
89,028 |
|
|
|
95,066 |
|
|
|
61,159 |
|
|
|
245,253 |
|
Research and development costs |
|
|
32,423 |
|
|
|
18,274 |
|
|
|
|
|
|
|
50,697 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss) |
|
|
188,076 |
|
|
|
214,022 |
|
|
|
(54,006 |
) |
|
|
348,092 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
$ |
144,165 |
|
|
$ |
67,552 |
|
|
$ |
12,787 |
|
|
$ |
224,504 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures |
|
$ |
76,140 |
|
|
$ |
55,937 |
|
|
$ |
21,933 |
|
|
$ |
154,010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21
FIDELITY NATIONAL INFORMATION SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Continued
For the six month period ended June 30, 2006 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transaction |
|
|
Lender |
|
|
|
|
|
|
|
|
|
Processing |
|
|
Processing |
|
|
Corporate |
|
|
|
|
|
|
Services |
|
|
Services |
|
|
and Other |
|
|
Total |
|
Processing and services revenues |
|
$ |
1,113,624 |
|
|
$ |
808,581 |
|
|
$ |
677 |
|
|
$ |
1,922,882 |
|
Cost of revenues |
|
|
862,464 |
|
|
|
479,591 |
|
|
|
|
|
|
|
1,342,055 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
251,160 |
|
|
|
328,990 |
|
|
|
677 |
|
|
|
580,827 |
|
Selling, general and administrative expenses |
|
|
90,604 |
|
|
|
109,236 |
|
|
|
71,755 |
|
|
|
271,595 |
|
Research and development costs |
|
|
34,345 |
|
|
|
17,361 |
|
|
|
|
|
|
|
51,706 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss) |
|
|
126,211 |
|
|
|
202,393 |
|
|
|
(71,078 |
) |
|
|
257,526 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
$ |
126,375 |
|
|
$ |
77,349 |
|
|
$ |
3,445 |
|
|
$ |
207,169 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures |
|
$ |
78,238 |
|
|
$ |
60,536 |
|
|
$ |
10,646 |
|
|
$ |
149,420 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transaction Processing Services
The Transaction Processing Services segment focuses on filling the processing and risk
management needs of large financial institutions, commercial lenders, independent community banks,
credit unions and retailers. The primary applications are software applications that function as
the underlying infrastructure of a financial institutions processing environment. These
applications include core bank processing software which banks use to maintain the primary records
of their customer accounts. This segment also provides a number of complementary applications and
services that interact directly with the core processing applications, including applications that
facilitate interactions between the segments financial institution customers and their clients.
This segment also includes card issuer services, which enable banks, credit unions, and others to
issue VISA and MasterCard credit and debit cards, private label cards, and other electronic payment
cards for use by both consumer and business accounts. In addition, this segment provides check
guarantee and verification services to retailers. Included in this segment was $153.0 million and
$105.2 million in revenue from non-U.S. based customers in the three month periods and $292.4
million and $187.1 million in revenue from non-U.S. based customers in the six month periods ended
June 30, 2007 and 2006, respectively.
Lender Processing Services
The Lender Processing Services segment provides a comprehensive range of products and services
related to the mortgage life cycle. The primary applications include core mortgage processing
applications and services which banks use to process and service mortgage loans as well as other
services, including origination, data gathering, risk management, servicing, default management and
property disposition services to lenders and other real estate professionals.
Corporate and Other
The Corporate and Other segment consists of operations and corporate overhead costs that are
not included in, or allocated to, the Transaction Processing Services segment or Lender Processing
Services segment.
(12) Recent Accounting Pronouncements
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and
Financial Liabilities (SFAS 159). SFAS 159 permits entities to choose to measure financial
instruments and certain other items at fair value that are not currently required to be measured at
fair value. SFAS 159 mandates certain financial statement presentation and disclosure requirements
when a company elects to report assets and liabilities at fair value under SFAS 159. SFAS 159 is
effective as of the beginning of January 1, 2008 for calendar year entities. Management is
currently evaluating the decision to elect SFAS 159, and the potential impact of adopting SFAS 159
on the Companys statements of financial position and operations.
22
FIDELITY NATIONAL INFORMATION SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Continued
(13) Acquisition of eFunds Corporation
On June 27, 2007, the Company announced that it had entered into a definitive agreement
whereby FIS will acquire EFD in an all cash transaction valued at approximately $1.8 billion. EFD
is a leading provider of risk management, electronic funds transfer services, prepaid card
processing, and global outsourcing solutions to more than 10,000 financial services companies in
more than 80 countries. EFD also provides point-of-sale fraud prevention solutions to retailers
and electronic benefits processing services to government entities. In 2006, EFD generated total
revenue of $552.4 million and net income of $54.5 million.
FIS plans to fund the $1.8 billion purchase price with a combination of cash on hand and
recently secured long-term debt commitments. On July 30, 2007, the Company, along with the
requisite lenders, executed an amendment to its existing Credit Agreement to facilitate its
acquisition of EFD. The amendment permits the issuance of up to $2.1 billion in additional loans,
of which a new $1.6 billion tranche of term loans will be funded to
finance the acquisition of EFD. The amendment becomes effective upon satisfaction of certain
conditions, including the closing of the EFD acquisition. The EFD acquisition is expected to be
completed before the end of the third quarter of 2007, subject to approval by EFD shareholders and
customary closing conditions.
As a result of the additional leverage expected to be incurred in connection with the EFD
acquisition, the applicable margin with respect to the Companys loans under its current Credit
Agreement is expected to increase by 37.5 basis points. The applicable margin under the new tranche
of term loans to be used to finance the EFD acquisition is expected to be higher than the revised
applicable margin under the Companys current Credit Agreement.
(14) Subsequent Events
Sale of Property Insight, LLC
On August 2, 2007 the Company announced the sale of one of its subsidiaries, Property Insight,
LLC (Property Insight), to FNF, for $95.0 million in cash. As of June 30, 2007, Property Insight
had approximately $14.8 million in net assets with working capital of $12.4 million. Property Insight is a
leading provider of title plant services for FNF, as well as to various national and regional title
insurance underwriters. Property Insight primarily manages, maintains, and updates the title
insurance plants that are owned by FNF. Additionally, Property Insight manages potential title
plant construction activities for FNF. The sale is expected to be completed by the end of the third
quarter of 2007, subject to certain regulatory approvals and customary closing conditions.
Evaluation of Check Services Business
On August 2, 2007, the Company announced that its management will evaluate strategic
alternatives for the Companys U.S. and Australian check services businesses. The Companys Board
of Directors authorized the plan, allowing management to investigate strategic alternatives. Check
Services is a leading provider of retail point-of-sale check risk management solutions, as well as
of cash access services to the gaming industry. There can be no assurance that any transaction will
result from this review.
Stock Repurchase
Subsequent to June 30, 2007, the Company repurchased 949,000 shares of FIS stock for
$47.4 million, at an average price per share of $49.93.
23
Unless stated otherwise or the context otherwise requires, all references in this Form 10-Q to
the registrant, us, we, our, the Company or FIS are to Fidelity National Information
Services, Inc., a Georgia corporation formerly known as Certegy Inc., and its subsidiaries since
the Certegy merger described in Note 5 and to Fidelity National Information Services, Inc., a
Delaware corporation, and its subsidiaries, prior to the Certegy merger; all references to
Certegy are to Certegy Inc., and its subsidiaries, prior to the Certegy merger described in Note
5; all references to Old FNF are to Fidelity National Financial, Inc., a Delaware corporation
that owned a majority of our shares through November 9, 2006; and all references to FNF are to
Fidelity National Financial, Inc. (formerly known as Fidelity National Title Group, Inc.), formerly
a subsidiary of Old FNF but now an independent company that remains a related entity from an
accounting perspective.
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with Item 1: Consolidated Financial
Statements and the Notes thereto included elsewhere in this report. The discussion below contains
forward-looking statements that involve a number of risks and uncertainties. Statements that are
not historical facts, including statements about our beliefs and expectations, are forward-looking
statements. Forward-looking statements are based on managements beliefs, as well as assumptions
made by, and information currently available to, management. Because such statements are based on
expectations as to future performance and are not statements of fact, actual results may differ
materially from those projected. We undertake no obligation to update any forward-looking
statements, whether as a result of new information, future events or otherwise. The risks and
uncertainties which forward-looking statements are subject to include, but are not limited to:
changes in general economic, business and political conditions, including changes in the financial
markets; the effects of our substantial leverage, which may limit the funds available to make
acquisitions and invest in our business; the risks of reduction in revenue from the elimination of
existing and potential customers due to consolidation in the banking, retail and financial services
industries; failure to adapt our services to changes in technology or in the marketplace; adverse
changes in the level of real estate activity, which would adversely affect certain of our
businesses; our potential inability to find suitable acquisition candidates or difficulties in
integrating acquisitions; significant competition that our operating subsidiaries face; the risks
and uncertainties related to our recently announced data theft, which continues to be investigated,
and which includes the potential for fines, increased operating costs and loss of business; the
possibility that our future acquisition of EFD/eFunds, which is subject to regulatory and EFD
shareholder approval, may not be completed or may not be accretive to our earnings due to
undisclosed liabilities, management or integration issues, loss of customers or other factors; and
other risks detailed in the Risk Factors and other sections of this Form 10-Q and in the
Statement Regarding Forward-Looking Information, Risk Factors and other sections of our most
recent Form 10-K and other filings with the Securities and Exchange Commission.
Overview
We are one of the largest global providers of processing services to financial institutions,
and are among the market leaders in core processing, card issuing services, check risk management,
mortgage processing, and certain other lender processing services in the U.S., serving customers in
over 60 countries throughout the world. We offer a diversified product mix, and we believe that we
will continue to benefit from the opportunity to cross-sell products and services across our broad
customer base, and from our expanded international presence and scale. We have two reporting
segments, Transaction Processing Services and Lender Processing Services, which produced
approximately 61% and 39%, respectively, of our revenues for the six months ended June 30, 2007.
|
|
|
Transaction Processing Services. This segment focuses on serving the processing and
risk management needs of financial institutions and retailers. Our primary software
applications function as the underlying infrastructure of a financial institutions
processing environment. These applications include core bank processing software, which
banks use to maintain the primary records of their customer accounts. We also provide a
number of complementary applications and services that interact directly with the core
processing applications, including applications that facilitate interactions between our
financial institution customers and their clients. We offer our applications and services
through a range of delivery and service models, including on-site outsourcing and remote
processing arrangements, as well as on a licensed software basis for installation on
customer-owned and operated systems. This segment also includes card issuer services, which
enable banks, credit unions, and others to issue VISA and MasterCard credit and debit
cards, private label |
24
|
|
|
cards, and other electronic payment cards for use by both consumer and business accounts. In
addition, we provide check guarantee and verification services to retailers. |
|
|
|
Lender Processing Services. This segment offers core mortgage processing software,
which banks use to process and service mortgage loans, as well as customized outsourced
business processes and information solutions primarily to national lenders and loan
servicers. These processes include centralized, customized title agency and closing
services offered to first mortgage, refinance, home equity and sub-prime lenders. In
addition, this segment provides default management services to national lenders and loan
servicers, allowing customers to outsource the business processes necessary to take a loan
and the underlying real estate securing the loan through the default and foreclosure
process. This segments information solutions include property data and real estate-related
services. Included in these services are appraisal and valuation services, property records
information, real estate tax services, and borrower credit and flood zone information. |
The Corporate and Other segment consists of the corporate overhead costs and other operations
that are not included in the other segments.
Critical Accounting Policies
There have been no significant changes to our critical accounting policies since our Form 10-K
was filed on March 1, 2007.
Transactions with Related Parties
We have historically conducted business with FNF and its subsidiaries, and other related
parties. See Note 3 of the Notes to Consolidated Financial Statements for a detailed description of
all the related party transactions.
Factors Affecting Comparability
The Consolidated Financial Statements included in this report that present our financial
condition and operating results reflect the following significant transaction:
|
|
|
On February 1, 2006, we merged into a wholly-owned subsidiary of Certegy. The
transaction resulted in a reverse acquisition with a total purchase price of approximately
$2.2 billion. Certegy provided credit card, debit card, and other transaction processing
and check risk management services to financial institutions and merchants in the U.S. and
internationally through two segments, Card Services and Check Services. |
Although the legal entity that survived the merger was Certegy (which has since been renamed
Fidelity National Information Services, Inc.), for accounting purposes, our historical financial
statements are those FIS. Our Consolidated Financial Statements include the results of
operations of Certegy, effective as of the date of the acquisition. As a result of the transaction,
the results of operations in the periods covered by the Consolidated Financial Statements may not
be directly comparable.
Recent Developments
Acquisition of eFunds Corporation
On June 27, 2007, we announced that we entered into a definitive agreement whereby we will
acquire eFunds Corporation (EFD) in an all cash transaction valued at approximately $1.8 billion.
EFD is a leading provider of risk management, electronic funds transfer services, prepaid card
processing, and global outsourcing solutions to more than 10,000 financial services companies in
more than 80 countries. EFD also provides point-of-sale fraud prevention solutions to retailers
and electronic benefits processing services to government entities. In 2006, EFD generated total
revenue of $552.4 million and net income of $54.5 million.
25
We plan to fund the $1.8 billion purchase price with a combination of cash on hand and
recently secured long-term debt commitments. On July 30, 2007, we, along with the requisite
lenders, executed an amendment to our existing Credit Agreement to facilitate our acquisition of
EFD. The amendment permits the issuance of up to $2.1 billion in additional loans, of which a new $1.6 billion tranche of term loans will be funded to finance the
acquisition of EFD. The amendment becomes effective upon satisfaction of certain conditions,
including the closing of the EFD acquisition. The EFD acquisition is expected to be completed before
the end of the third quarter of 2007, subject to approval by EFD shareholders and customary closing
conditions.
Comparisons of three and six month periods ended June 30, 2007 and 2006
Consolidated Results of Operations
(in thousands, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three month periods |
|
|
Six month periods |
|
|
|
ended June 30, |
|
|
ended June 30, |
|
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
|
|
(unaudited) |
|
|
(unaudited) |
|
Processing and services revenues |
|
$ |
1,176,238 |
|
|
$ |
1,021,946 |
|
|
$ |
2,300,304 |
|
|
$ |
1,922,882 |
|
Cost of revenues |
|
|
842,946 |
|
|
|
719,718 |
|
|
|
1,656,262 |
|
|
|
1,342,055 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
333,292 |
|
|
|
302,228 |
|
|
|
644,042 |
|
|
|
580,827 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses |
|
|
125,770 |
|
|
|
125,866 |
|
|
|
245,253 |
|
|
|
271,595 |
|
Research and development costs |
|
|
23,588 |
|
|
|
23,646 |
|
|
|
50,697 |
|
|
|
51,706 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
183,934 |
|
|
|
152,716 |
|
|
|
348,092 |
|
|
|
257,526 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
|
578 |
|
|
|
1,533 |
|
|
|
1,267 |
|
|
|
3,424 |
|
Interest expense |
|
|
(42,991 |
) |
|
|
(49,033 |
) |
|
|
(115,106 |
) |
|
|
(92,301 |
) |
Gain on sale of Covansys stock |
|
|
92,044 |
|
|
|
|
|
|
|
92,044 |
|
|
|
|
|
Other income (expense), net |
|
|
812 |
|
|
|
866 |
|
|
|
1,480 |
|
|
|
(1,244 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense) |
|
|
50,443 |
|
|
|
(46,634 |
) |
|
|
(20,315 |
) |
|
|
(90,121 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings before income taxes, equity in earnings of
unconsolidated entities and minority interest |
|
|
234,377 |
|
|
|
106,082 |
|
|
|
327,777 |
|
|
|
167,405 |
|
Income tax expense |
|
|
86,533 |
|
|
|
40,629 |
|
|
|
121,278 |
|
|
|
64,116 |
|
Equity in earnings of unconsolidated entities |
|
|
736 |
|
|
|
259 |
|
|
|
1,672 |
|
|
|
2,092 |
|
Minority interest |
|
|
576 |
|
|
|
(317 |
) |
|
|
664 |
|
|
|
(6 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings |
|
$ |
148,004 |
|
|
$ |
66,029 |
|
|
$ |
207,507 |
|
|
$ |
105,387 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings per share basic |
|
$ |
0.77 |
|
|
$ |
0.34 |
|
|
$ |
1.08 |
|
|
$ |
0.58 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding basic |
|
|
192,743 |
|
|
|
192,224 |
|
|
|
192,323 |
|
|
|
181,168 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings per share diluted |
|
$ |
0.75 |
|
|
$ |
0.34 |
|
|
$ |
1.06 |
|
|
$ |
0.57 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding diluted |
|
|
196,977 |
|
|
|
195,374 |
|
|
|
196,395 |
|
|
|
184,242 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Processing and Services Revenues
Processing and services revenues totaled $1.2 billion and $1.0 billion in the three months and
$2.3 billion and $1.9 billion in the six months ended June 30, 2007 and 2006, respectively. The
increase in the three months ended June 30, 2007 as compared to the three months ended June 30,
2006 of $154.3 million, or 15.1%, was primarily due to organic growth across both segments. Growth
in the Transaction Processing Services segment was driven by strong new sales, particularly in our
international operations. The growth in the Lender Processing Services segment is primarily
attributable to continuing increased demand for our default related services and market share gains
in our appraisal services. The net impact of several small acquisitions and the deconsolidation of
Fidelity National Real Estate Solutions, Inc. (FNRES) were insignificant. For the six months
ended June 30, 2007 compared to the six months ended June 30, 2006, the increase of $377.4 million
was due primarily to the same growth trends discussed above, with the impact of the Certegy Merger
(see Note 5) contributing one additional month in the current year, or approximately $96.4 million
of the total increase.
Cost of Revenues
Cost of revenues totaled $842.9 million and $719.7 million for the three months and $1.7
billion and $1.3 billion for the six months ended June 30, 2007 and 2006, respectively. The
increase in cost of revenues of $123.2 million in the three months ended June 30, 2007 as compared
to the same three months in the prior year is primarily the result
26
of increased costs associated with the increased revenues. The increase in cost of revenues
of $314.2 million in the six months ended June 30, 2007 compared with the six months ended June 30,
2006 is attributable to the growth trends across both segments and the impact of one additional
month of Certegy in the current year, which contributed approximately $76.0 million of the total
increase.
Gross Profit
Gross profit as a percentage of revenues was 28.3% and 29.6% for three months and 28.0% and
30.2% for the six months ended June 30, 2007 and 2006, respectively. The decrease in gross profit
margin is due primarily to the Lender Processing Services segment which has been experiencing
growth in lower margin product lines, particularly our appraisal services, along with declining
margins in our tax and property exchange services due to the overall slowing of the real estate
market. The impact of declining margins in these business lines is greater for the six month
period comparison than for the most current three months due to the offsetting effect of targeted
expense reductions made as a result of the lower volumes.
Selling, General and Administrative Expenses
Selling, general and administrative expenses totaled $125.8 million and $125.9 million for
three months and $245.3 million and $271.6 million for the six months ended June 30, 2007 and 2006,
respectively. While there is no significant change in the three month period comparison, the
decrease of $26.3 million for the six months ended June 30, 2007 as compared to the six months
ended June 30, 2006 primarily relates to the decrease in stock based compensation expense. Stock
based compensation decreased from $32.8 million in the six months ended June 30, 2006 to $17.2
million in the six months ended June 30, 2007, or $15.6 million. The decrease in stock-based
compensation is attributable to the $24.5 million in expense recorded for the vesting of the FIS
performance-based options granted in March 2005 for which the performance criteria was met during
the first quarter of 2006. After the impact of stock compensation, the remaining decrease results
from achieving current year cost reductions associated with further integration of the Certegy
merger, partially offset by the impact of additional costs associated with the newly formed
Brazilian business process outsourcing operation.
Research and Development Costs
Research and development costs totaled $23.6 million and $23.6 million for three months and
$50.7 million and $51.7 million for the six months ended June 30, 2007 and 2006, respectively.
Operating Income
Operating income totaled $183.9 million and $152.7 million for the three months and $348.1
million and $257.5 million for the six months ended June 30, 2007 and 2006, respectively. Operating
income was 15.6% and 14.9% of total revenue for the three months, and 15.1% and 13.4% of total
revenue in the six months ended June 30, 2007 and 2006, respectively. The increase in 2007
reflects the factors discussed above.
Interest expense
Interest expense totaled $43.0 million and $49.0 million for three months and $115.1 million
and $92.3 million for the six months ended June 30, 2007 and 2006, respectively. The decrease in
the three month period ended June 30, 2007 as compared to the three month period ended June 30,
2006 results from more favorable interest rates under our new credit facility as well as a lower
outstanding long-term debt balance. The increase for the six months ended June 30, 2007 compared
to the six months ended June 30, 2006 results primarily from the inclusion of a $27.2 million
charge to write-off of capitalized debt issuance costs relating to our prior credit facility,
partially offset by the impact of lower interest rates and the lower long-term debt balance.
Income Tax Expense
FIS recorded income tax expense of $86.5 million and $40.6 million for the three months and
$121.3 million and $64.1 million for the six months ended June 30, 2007 and 2006, respectively.
This resulted in an effective tax rate of 36.9% and 37.0% for the three and six months ended June
30, 2007, respectively, and 38.3% for the three and six
27
months ended June 30, 2006. The increase in tax expense is attributable to increased
operating income and the gain on sale of Covansys common stock. The decrease in the overall
effective tax rate for the three month period is due to the increase in foreign pre-tax income,
which is taxed at reduced rates.
Net Earnings
Net earnings were $148.0 million and $66.0 million for the three months and $207.5 million and
$105.4 million for the six months ended June 30, 2007 and 2006, respectively, and diluted earnings
per share totaled $0.75 and $0.34 for the three months and $1.06 and $0.57 for the six months ended
June 30, 2007 and 2006, respectively. Included in net earnings for the three and six months ended
June 30, 2007 is an after tax gain of $58.0 million from the sale of Covansys stock.
Segment Results of Operations
Transaction Processing Services
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three month periods ended |
|
|
Six month periods ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
|
|
(Unaudited) |
|
|
(Unaudited) |
|
|
|
(In thousands) |
|
|
(In thousands) |
|
Processing and services revenues |
|
$ |
709,724 |
|
|
$ |
612,076 |
|
|
$ |
1,390,269 |
|
|
$ |
1,113,624 |
|
Cost of revenues |
|
|
550,691 |
|
|
|
474,648 |
|
|
|
1,080,742 |
|
|
|
862,464 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
159,033 |
|
|
|
137,428 |
|
|
|
309,527 |
|
|
|
251,160 |
|
Selling, general and administrative expenses |
|
|
45,989 |
|
|
|
51,088 |
|
|
|
89,028 |
|
|
|
90,604 |
|
Research and development costs |
|
|
14,905 |
|
|
|
15,268 |
|
|
|
32,423 |
|
|
|
34,345 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
$ |
98,139 |
|
|
$ |
71,072 |
|
|
$ |
188,076 |
|
|
$ |
126,211 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues for the Transaction Processing Services segment are derived from three main revenue
channels; Enterprise Solutions, Integrated Financial Solutions and International. Revenues from the
Transaction Processing Services segment totaled $709.7 million and $612.1 million for three months
and $1.4 billion and $1.1 billion for the six months ended June 30, 2007 and 2006, respectively.
The overall segment increase of $97.6 million in the three months ended June 30, 2007, as compared
to the three months ended June 30, 2006, was attributable to strong organic growth across all three
revenue channels. The International channel contributed $44.0 million to the overall increase,
with $21.9 million coming from the newly formed business process outsourcing operation in Brazil.
In total, Enterprise Solutions contributed $270.1 million, Integrated Financial Solutions
contributed $297.1 million and International contributed $143.3 million of revenue in the three
months ended June 30, 2007 compared to $239.8 million, $275.9 million and $99.3 million in the
three months ended June 30, 2006, respectively. The increase in overall revenues for the six
month period ended June 30, 2007 of $276.6 million results from the previously mentioned growth,
including $39.3 million in the Brazilian outsourcing operation, combined with the impact of one
additional month of Certegy revenues which totaled $96.4 million. The expansion of revenues across
all three channels is driven by both new customers and increased cross selling of products and
services to existing customers.
Cost of revenues for the Transaction Processing Services segment totaled $550.7 million and
$474.6 million for the three months and $1.1 billion and $862.5 million for the six months ended
June 30, 2007 and 2006, respectively. The $76.1 million increase in the three months ending June
30, 2007, as compared to the three months ended June 30, 2006, was primarily attributable to
increased labor and other variable costs attributable to the increased revenues. Gross profit as a
percentage of revenues was 22.4% and 22.5% for the three months and 22.3% and 22.6% for the six
months ending June 30, 2007 and 2006, respectively.
Selling, general and administrative expenses for the Transaction Processing Services segment
totaled $46.0 million and $51.1 million for the three months and $89.0 million and $90.6 million
for the six months ended June 30, 2007 and 2006, respectively. The decrease in 2007 is primarily
attributable to reduced management and administrative expenses due to targeted expense reductions,
offset by one additional month of Certegy and the impact of the new Brazilian outsourcing
operation.
28
Research and development costs totaled $14.9 million and $15.3 million for the three months
and $32.4 million and $34.3 million for the six months ended June 30, 2007 and 2006, respectively.
Operating income totaled $98.1 million and $71.1 million for the three months and $188.1
million and $126.2 million for the six months ended June 30, 2007 and 2006, respectively. Operating
margin was approximately 13.8% and 11.6% of total revenues for the three months and 13.5% and 11.3%
of total revenues for the six months ended June 30, 2007 and 2006, respectively. The increase in
the operating margin for the three months ended June 30, 2007 as compared to the three months ended
June 30, 2006 is attributable to the increase in gross profit, combined with the slight decline in
selling, general, and administrative expenses.
Lender Processing Services
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three month periods ended |
|
|
Six month periods ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
|
|
(Unaudited) |
|
|
(Unaudited) |
|
|
|
(In thousands) |
|
|
(In thousands) |
|
Processing and services revenues |
|
$ |
462,493 |
|
|
$ |
408,081 |
|
|
$ |
902,882 |
|
|
$ |
808,581 |
|
Cost of revenues |
|
|
292,255 |
|
|
|
245,070 |
|
|
|
575,520 |
|
|
|
479,591 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
170,238 |
|
|
|
163,011 |
|
|
|
327,362 |
|
|
|
328,990 |
|
Selling, general and administrative expenses |
|
|
48,110 |
|
|
|
50,173 |
|
|
|
95,066 |
|
|
|
109,236 |
|
Research and development costs |
|
|
8,683 |
|
|
|
8,378 |
|
|
|
18,274 |
|
|
|
17,361 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
$ |
113,445 |
|
|
$ |
104,460 |
|
|
$ |
214,022 |
|
|
$ |
202,393 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from the Lender Processing Services segment totaled $462.5 million and $408.1 million
for the three months and $902.9 million and $808.6 million for the six months ended June 30, 2007
and 2006, respectively. The overall segment increase of $54.4 million for the three months ended
June 30, 2007, as compared to the three months ended June 30, 2006, was primarily attributable to
increased demand for our appraisal services, continued growth in our default management services,
and an increase in revenues earned from FNF. These increases are partially offset by reductions in
some of our businesses that are more prone to cyclicality in the real estate market, and
deconsolidation of FNRES.
Cost of revenues for the Lender Processing Services segment totaled $292.3 million and $245.1
million for the three months and $575.5 million and $479.6 million for the six months ended June
30, 2007 and 2006, respectively. The $47.2 million increase in the three months ending June 30,
2007, as compared to the three months ended June 30, 2006, was primarily attributable to increased
personnel, data processing, and other variable costs as a result of increased sales. Gross profit
as a percentage of revenues was 36.8% and 39.9% for the three months and 36.3% and 40.7% for the
six months ended June 30, 2007 and 2006, respectively. The decrease in gross profit percentage
relates primarily to growth in lower margin product lines, in particular appraisal and other
professional services, along with the decline in tax and property exchange services, which
typically have higher margins, due to the slowing of the real estate market.
Selling, general and administrative expenses relating to the Lender Processing Services
segment totaled $48.1 million and $50.2 million for the three months and $95.1 million and $109.2
million for the six months ended June 30, 2007 and 2006, respectively. The decrease in 2007 is
primarily attributable to the deconsolidation of FNRES.
Research and development costs totaled $8.7 million and $8.4 million for the three months and
$18.3 million and $17.4 million for the six months ended June 30, 2007 and 2006, respectively.
Operating income for the Lender Processing Services segment totaled $113.4 million and $104.5
million for the three months and $214.0 million and $202.4 million for the six months ended June
30, 2007 and 2006, respectively. Operating income was 24.5% and 25.6% of revenues for the three
months and 23.7% and 25.0% of revenues for the six months ended June 30, 2007 and 2006,
respectively.
29
Corporate and Other
The Corporate and Other segment consists of the corporate overhead costs and additional small
operations that are not included in the other segments. Corporate costs are primarily incurred
directly by us, however, the prior year includes some amounts that were allocated from FNF prior to
the merger with Old FNF, including stock based compensation. Selling, general and administrative
expenses were $31.7 million and $24.6 million for the three months and $61.2 million and $71.8
million for the six months ended June 30, 2007 and 2006, respectively. The increase of $7.1 million
for the three months ended June 30, 2007 compared to the same period in 2006 is primarily
attributable to increased benefit costs including stock compensation and other plans. The decrease
in the six month period ended June 30, 2007 primarily relates to a decrease in stock based
compensation expense which decreased from $32.8 million in 2006 to $17.2 million in 2007. This
decrease is primarily attributable to the $24.5 million in expense recorded for the vesting of the
FIS performance-based options granted in March 2005 for which the performance criteria were met
during the first quarter of 2006.
Pro forma Segment Information
Summarized pro forma financial information concerning our reportable segments is shown in the
following tables. For comparative reasons the 2007 historical results below have been included,
while the 2006 results below have been adjusted on a pro forma basis to reflect a January 1, 2006,
effective date for the Merger with Certegy.
For the six month period ended June 30, 2007 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transaction |
|
|
Lender |
|
|
|
|
|
|
|
|
|
Processing |
|
|
Processing |
|
|
Corporate |
|
|
|
|
|
|
Services |
|
|
Services |
|
|
and Other |
|
|
Total |
|
Processing and services revenues |
|
$ |
1,390,269 |
|
|
$ |
902,882 |
|
|
$ |
7,153 |
|
|
$ |
2,300,304 |
|
Cost of revenues |
|
|
1,080,742 |
|
|
|
575,520 |
|
|
|
|
|
|
|
1,656,262 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
309,527 |
|
|
|
327,362 |
|
|
|
7,153 |
|
|
|
644,042 |
|
Selling, general and administrative expenses |
|
|
89,028 |
|
|
|
95,066 |
|
|
|
61,159 |
|
|
|
245,253 |
|
Research and development costs |
|
|
32,423 |
|
|
|
18,274 |
|
|
|
|
|
|
|
50,697 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss) |
|
$ |
188,076 |
|
|
$ |
214,022 |
|
|
$ |
(54,006 |
) |
|
$ |
348,092 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the six month period ended June 30, 2006 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transaction |
|
|
Lender |
|
|
|
|
|
|
|
|
|
Processing |
|
|
Processing |
|
|
Corporate |
|
|
|
|
|
|
Services |
|
|
Services |
|
|
and Other (a) |
|
|
Total |
|
Processing and services revenues |
|
$ |
1,204,587 |
|
|
$ |
808,581 |
|
|
$ |
2,629 |
|
|
$ |
2,015,797 |
|
Cost of revenues |
|
|
942,538 |
|
|
|
479,591 |
|
|
|
|
|
|
|
1,422,129 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
262,049 |
|
|
|
328,990 |
|
|
|
2,629 |
|
|
|
593,668 |
|
Selling, general and administrative expenses |
|
|
95,015 |
|
|
|
109,236 |
|
|
|
154,234 |
|
|
|
358,485 |
|
Research and development costs |
|
|
34,345 |
|
|
|
17,361 |
|
|
|
|
|
|
|
51,706 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss) |
|
$ |
132,689 |
|
|
$ |
202,393 |
|
|
$ |
(151,605 |
) |
|
$ |
183,477 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Corporate and Other, for the six months ended June 30, 2006, includes merger related costs at
Certegy of $79.7 million incurred prior to the acquisition date and a $24.5 million charge
relating to the vesting of performance based options at FIS triggered by the closing of the
merger. |
Liquidity and Capital Resources
Cash Requirements
Our cash requirements include cost of revenues, selling, general and administrative expenses,
income taxes, debt service payments, capital expenditures, systems development expenditures and
business acquisitions. Our principal sources of funds are cash generated by operations and
borrowings.
At June 30, 2007, we have cash on hand of $220.9 million and debt of approximately $2.9
billion, including the current portion. We expect 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 absent any unusual
30
circumstances such as acquisitions or adverse changes in the business environment. We plan to
fund the $1.8 billion purchase of eFunds with a combination of cash on hand and recently secured
long- term debt commitments.
We currently pay quarterly dividends to our shareholders of $0.05 per share and expect to
continue to do so in the future, although the payment of any future dividends is at the discretion
of our Board of Directors and subject to any limits in our debt or other agreements.
We intend to limit dilution caused by option exercises, including anticipated exercises, by
repurchasing shares on the open market or in privately negotiated transactions. During 2006, we
repurchased 4,261,200 shares at an average price of $37.60 under this program. On October 25, 2006,
our Board of Directors approved a plan authorizing repurchases of up to an additional $200 million
worth of our common stock. Subsequent to June 30, 2007, we repurchased approximately 949,000 shares of our stock for $47.4 million, at an average price per share of $49.93.
Capital Expenditures
Our principal capital expenditures are for computer software (purchased and internally
developed) and additions to property and equipment. In 2006, we spent approximately $300.2 million
on capital expenditures. We spent $154.0 million during the six months ended June 30, 2007. We
expect to spend approximately $300.0 million by the end of the year, primarily on equipment,
purchased software and internally developed software.
Financing
On January 18, 2007, we entered into a credit agreement with JPMorgan Chase Bank, N.A., as
Administrative Agent, Swing Line Lender, and Line of Credit Issuer, Bank of America, N.A., as Swing
Line Lender, and other financial institutions thereto (the Credit Agreement). The Credit
Agreement replaced our prior term loans and revolver as well as our prior $100 million Settlement
Facility (as defined below). As a result of the new Credit Agreement, the Company repaid the old
credit agreement and recorded a charge of $27.2 million to write-off capitalized debt issuance
costs. The Credit Agreement, which is unsecured, provides for a committed $2.1 billion five-year
term facility denominated in U.S. Dollars (the Term Loan) and a committed $900 million revolving
credit facility (the Revolving Loan) with a sublimit of $250 million for letters of credit and a
sublimit of $250 million for swing line loans, maturing on the fifth anniversary of the closing
date (the Maturity Date). The Revolving Loan is bifurcated into a $735 million multicurrency
revolving credit loan (the Multicurrency Tranche) that can be denominated in any combination of
U.S. Dollars, Euro, British Pounds Sterling and Australian Dollars, and any other foreign currency
in which the relevant lenders agree to make advances, and a $165 million U.S. Dollar revolving
credit loan that can be denominated only in U.S. Dollars. The swingline loans and letters of credit
are available as a sublimit under the Multicurrency Tranche. In addition, the Credit Agreement
provides for an uncommitted incremental loan facility in the uncommitted maximum principal amount
of $600 million, which will be made available only upon receipt of further commitments from lenders
under the Credit Agreement sufficient to fund the amount requested by us.
The Term Loan balance was $2.1 billion and a total of $430.5 million was outstanding under the
Revolving Loan as of June 30, 2007. The obligations under the Credit Agreement have been jointly
and severally unconditionally guaranteed by substantially all of the domestic subsidiaries of our
company.
We may borrow, repay and re-borrow amounts under the Revolving Loan from time to time until
the maturity of the Revolving Loan. We must make quarterly principal payments under the Term Loan
in scheduled installments of: (a) $13.1 million per quarter from June 30, 2007 through December 31,
2008; (b) $26.3 million per quarter from March 31, 2009 through December 31, 2009; and (c) $52.5
million per quarter from March 31, 2010 through September 30, 2011, with the remaining balance of
approximately $1.5 billion payable on the Maturity Date.
In addition to the scheduled principal payments, the Term Loan is (with certain exceptions)
subject to mandatory prepayment upon issuances of debt, casualty and condemnation events, and sales
of assets. Voluntary prepayments of the Loans are generally permitted at any time without fee upon
proper notice and subject to a minimum dollar requirement. Commitment reductions of the Revolving
Loan are also permitted at any time without fee upon proper notice. The Revolving Loan has no
scheduled principal payments, but it will be due and payable in full on the Maturity Date.
31
The outstanding balance of the Loans bears interest at a floating rate, which is at our
option, either (a) the eurocurrency rate plus an applicable margin and mandatory cost or (b) either
(i) the federal funds
rate plus an applicable margin or (ii) the prime rate. The applicable margin is subject to adjustment based on a leverage
ratio (total indebtedness to EBITDA, as further defined in the Credit Agreement). Alternatively, we
have the ability to request the lenders to submit competitive bids for one or more advances under
the Revolving Loan (the Bid Rate Advances).
The Credit Agreement provides procedures for lenders to submit bids for Bid Rate Advances and
for us to accept or reject them. The Credit Agreement contains affirmative, negative and financial
covenants customary for financings of this type, including, among other things, limits on the
creation of liens, limits on the incurrence of indebtedness, restrictions on investments and
dispositions, limitations on dividends and other restricted payments, a minimum interest coverage
ratio and a maximum leverage ratio. Upon an event of default, the Administrative Agent can
accelerate the maturity of the loan. Events of default include conditions customary for such an
agreement, including failure to pay principal and interest in a timely manner and breach of certain
covenants. We believe that we are in compliance with all covenants related to the Credit Agreement
at June 30, 2007.
In connection with the new Credit Agreement, we terminated our prior credit agreement on
January 18, 2007 and repaid it in full before its final scheduled expiration date of March 9, 2013.
The final payment was approximately $2.64 billion, including principal, interest and fees. We
incurred no early termination penalties in terminating the this credit agreement.
We also had a $100 million unsecured revolving credit facility that we used to finance our
customers shortfalls in the daily funding requirements associated with our credit and debit card
settlement operations (the Settlement Facility). Amounts borrowed were typically repaid within
one to two business days, as customers funded the shortfalls. This facility had a term of 364 days
and was renewed annually. There were no amounts outstanding under this facility at December 31,
2006. The Settlement Facility was terminated on January 18, 2007.
On June 26, 2007, we received a commitment letter from J.P. Morgan Securities, Inc., JPMorgan
Chase Bank, N.A., Bank of America, N.A., and Banc of America Securities, LLC, to provide a new $1.6
billion tranche of term loans. The proceeds of the new tranche of term
loans will be used to finance the EFD acquisition, and pay related fees and expenses. Subsequent
to quarter end, on July 16, 2007 the commitment letter was amended to add Wachovia Capital Markets,
LLC, and Wachovia Bank, N.A. to the commitment parties.
As a result of the additional leverage expected to be incurred in connection with the EFD
acquisition, the applicable margin with respect to our loans under our current Credit Agreement is
expected to increase by 37.5 basis points. The applicable margin under the new tranche of term
loans to be used to finance the EFD acquisition is expected to be higher than the revised
applicable margin under our current Credit Agreement.
Contractual Obligations
Our long-term contractual obligations generally include our long-term debt and operating lease
payments on certain of our property and equipment. The 5-year
schedule as of June 30, 2007 is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
|
2008 |
|
|
2009 |
|
|
2010 |
|
|
2011 |
|
|
Thereafter |
|
|
Total |
|
Long-term debt (Note 7) (1) |
|
$ |
65,669 |
|
|
$ |
294,743 |
|
|
$ |
153,944 |
|
|
$ |
218,846 |
|
|
$ |
166,209 |
|
|
$ |
1,953,013 |
|
|
$ |
2,852,424 |
|
Interest (1) |
|
|
85,277 |
|
|
|
163,474 |
|
|
|
149,908 |
|
|
|
140,675 |
|
|
|
128,011 |
|
|
|
5,713 |
|
|
|
673,058 |
|
Operating leases |
|
|
24,171 |
|
|
|
46,667 |
|
|
|
37,164 |
|
|
|
25,675 |
|
|
|
14,201 |
|
|
|
18,665 |
|
|
|
166,543 |
|
Investment commitments |
|
|
32,943 |
|
|
|
37,094 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
70,037 |
|
Purchase commitments (2) |
|
|
31,705 |
|
|
|
25,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
56,705 |
|
Data processing agreement
obligations |
|
|
20,901 |
|
|
|
50,278 |
|
|
|
53,900 |
|
|
|
55,990 |
|
|
|
55,645 |
|
|
|
325,213 |
|
|
|
561,927 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
260,666 |
|
|
$ |
617,256 |
|
|
$ |
394,916 |
|
|
$ |
441,186 |
|
|
$ |
364,066 |
|
|
$ |
2,302,604 |
|
|
$ |
4,380,694 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The long-term debt and interest projections do not include any additional borrowings that will be made in
connection with the closing of the EFD transaction. |
|
(2) |
|
These represent amounts committed to Covansys under our original Master Services Agreement and do not reflect
adjustments relating to the amended agreement (Note 3). Under the amended agreement the projected minimum payments are
$18.8 million for the remainder of 2007 and $33.3 million in 2008. |
32
Off-Balance Sheet Arrangements
We do not have any material off-balance sheet arrangements other than the Wisconsin lease
discussed below.
We have a synthetic lease arrangement (the Wisconsin Lease) which is not included in our
consolidated balance sheets with respect to our facilities in Madison, Wisconsin (the Wisconsin
Leased Property). In connection with the Certegy Merger, the term of the Wisconsin Lease was
amended so that it was scheduled to expire on December 31, 2006. The term of the Wisconsin Lease
has since been further amended so that it now expires on December 31, 2007. The original cost to
the lessor of the Wisconsin Leased Property when Certegy entered into the Wisconsin Lease was
approximately $10.1 million. Subject to the satisfaction of certain conditions, we have the option
to acquire the Wisconsin Leased Property at its original cost, or to direct the sale of the
Wisconsin Leased Property to a third party.
Escrow Arrangements
In conducting our operations, we routinely hold customers assets in escrow, pending
completion of real estate transactions. Certain of these amounts are maintained in segregated bank
accounts and have not been included in the accompanying Consolidated Balance Sheets. We have a
contingent liability relating to proper disposition of these balances, which amounted to $1.8
billion at June 30, 2007. As a result of holding these customers assets in escrow, we have ongoing
programs for realizing economic benefits during the year through favorable borrowing and vendor
arrangements with various banks. There were no investments or loans outstanding as of June 30,
2007, related to these arrangements.
Recent Accounting Pronouncements
In February 2007, the FASB issued Statement of Financial Accounting Standards (SFAS) No.
159, The Fair Value Option for Financial Assets and Financial Liabilities (SFAS 159). SFAS 159
permits entities to choose to measure financial instruments and certain other items at fair value
that are not currently required to be measured at fair value. SFAS 159 mandates certain financial
statement presentation and disclosure requirements when a company elects to report assets and
liabilities at fair value under SFAS 159. SFAS 159 is effective as of the beginning of January 1,
2008 for calendar year entities. Management is currently evaluating the potential impact of
adopting SFAS 159 on our statements of financial position and operations.
Item 3. Quantitative and Qualitative Disclosure About Market Risks
As of June 30, 2007, we are paying interest on the Credit Agreement at LIBOR plus 0.875%, or
6.195%. A one percent increase in the LIBOR rate would increase our annual debt service on the
Credit Agreement by $14.0 million (based on principal amounts outstanding at June 30, 2007, net of
interest rate swaps as of April 11, 2007). The credit rating assigned to FIS by Standard & Poors
was BB+ at June 30, 2007.
In April 2005, we entered into interest rate swap agreements in connection with our prior term
loans (or any replacement debt, including the Term Loan). Under these agreements, we receive a
LIBOR rate of interest in exchange for paying a fixed rate of approximately 4.38% until April 2008
on $350 million of notional principal amount. In April 2007, we entered into a further interest
rate swap agreement. Under this agreement, we receive a LIBOR rate of interest in exchange for
paying a fixed rate of 4.92% until April 2010, on $850 million of notional principal amount. We
have designated these interest rate swaps as cash flow hedges in accordance with SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities. The estimated fair value of these
cash flow hedges results in an asset of $11.5 million and $4.9 million, as of June 30, 2007 and
December 31, 2006, respectively, which is included in the accompanying Consolidated Balance Sheets
in other noncurrent assets and as a component of accumulated other comprehensive earnings, net of
deferred taxes. 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
Loan.
Our existing cash flow hedges are highly effective and there is no current impact on earnings
due to hedge ineffectiveness. It is our policy to execute such instruments with credit-worthy banks
and not to enter into derivative financial instruments for speculative purposes.
33
Item 4. Controls and Procedures
As of the end of the period covered by this report, we carried out an evaluation, under the
supervision and with the participation of our principal executive officer and principal financial
officer, of the effectiveness of the design and operation of our disclosure controls and
procedures, as such term is defined in Rule 13a-15(e) under the Exchange Act. Based on this
evaluation, our principal executive officer and principal financial officer concluded that our
disclosure controls and procedures are effective to provide reasonable assurance of timely alerts
to material information required to be included in our periodic SEC reports.
There were no changes in our internal control over financial reporting that occurred during
the most recent fiscal quarter that have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.
Part II: OTHER INFORMATION
Item 1. Legal Proceedings
In the ordinary course of business, we are involved in various pending and threatened
litigation matters related to operations, some of which include claims for punitive or exemplary
damages. We believe that no actions, other than the matters listed below, depart from customary
litigation incidental to the business. As background to the disclosure below, please note the
following:
|
|
|
These matters raise difficult and complicated factual and legal issues and are subject
to many uncertainties and complexities. |
|
|
|
|
We review these matters on an ongoing basis and follow the provisions of SFAS No. 5,
Accounting for Contingencies (SFAS 5), when making accrual and disclosure decisions. When
assessing reasonably possible and probable outcomes, we base decisions on the assessment of
the ultimate outcome following all appeals. |
We and certain of our employees were named as defendants in a civil lawsuit brought by Grace &
Digital Information Technology Co., Ltd. (Grace). Grace was a sales agent engaged by Alltel
Information Services, Inc. (AIS) in June of 2001. In March of 2002 (before AIS was acquired by
Fidelity National Financial, Inc.), Graces contract was terminated because Grace was no longer
providing sales agent services. In May of 2004, Grace asserted a claim for unpaid sales
commissions, and filed suit against us later that same year in Monterey County, California. The
case was subsequently re-filed in the United States District Court for the Middle District of
Florida in March of 2006. In the lawsuit, Grace alleged damages caused by breach of contract,
violation of the Racketeer Influenced and Corrupt Organizations (the RICO) Act and violation of
the Foreign Corrupt Practices Act (the FCPA). Graces FCPA and RICO allegations prompted
inquiries by both the Securities and Exchange Commission and the U.S. Department of Justice. Our
legal counsel investigated Graces RICO and FCPA allegations and concluded that no violations had
occurred. We vigorously defended the civil lawsuit, and in March of 2007 the court dismissed the
RICO claims with prejudice and struck Graces FCPA allegations. The parties subsequently settled
the remaining breach of contract claim at court-ordered mediation in April of 2007. We continue to
fully cooperate with the Securities and Exchange Commission and the U.S. Department of Justice.
34
Item 1A. Risk Factors
The following is in addition to the matters described in the Risk Factors section of our Form
10-K for the year ended December 31, 2006.
Misappropriation of consumer data by a former employee could materially adversely affect our
relationship with governing organizations, customers or regulators.
On July 3, 2007, we announced the misappropriation of consumer information by one of our
former employees. Our investigation into this matter is on-going. To date, after elimination of
duplications and invalid data, we have determined that approximately 8.5 million consumer records
were stolen. Some of these records contained only identifying information (i.e., name, address,
telephone number and in some cases, date of birth). However, approximately 5.7 million of the
records included checking account information and approximately 1.5 million included credit card
information. Although the substantial majority of this information was from our check
authorization and gaming operations businesses, we have also determined that a portion of the
stolen credit card information was derived from our credit card issuance business. Because the
investigation is continuing, it is possible that more records may be identified in the future. To
date, we have seen no evidence of the stolen information being used for anything other than
marketing purposes. Although we do not anticipate significant liability to consumers or for
financial fraud, there can be no assurance that this matter will not result in fines or other
consequences that adversely impact us or our relationship with governing organizations (such as the
VISA and MasterCard issuing organizations), customers or regulators.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
On June 8, 2007, we acquired Espiel, Inc. and Financial Systems Integrators, Inc. (Espiel)
for approximately $43.3 million, consisting of approximately $39.0 million in cash and the issuance
of approximately 119,000 shares of our common stock. The shares of our common stock that were
issued to Espiel shareholders in this acquisition were issued in reliance on an exemption from the
registration requirements of the Securities Act of 1933, as amended (the Act), pursuant to Rule
506 of Regulation D promulgated thereunder. We believe that the Espiel private offering qualified
for exemption from registration pursuant to Rule 506 of Regulation D because the shares of our
common stock issued were issued solely to accredited investors, as that term is defined in Rule
501 of Regulation D.
Item 4. Submission of Matters to a Vote of Security Holders
Our Annual Meeting of Stockholders was held on May 23, 2007. The results of matters submitted
to a vote were as follows:
Nominees for Class 1 directors to serve until the 2010 FIS Annual Meeting of Shareholders were
elected by the following vote:
|
|
|
|
|
|
|
|
|
|
|
Shares Voted |
|
Authority to Vote |
|
|
For |
|
Withheld |
Lee A. Kennedy |
|
|
163,641,278 |
|
|
|
5,247,218 |
|
Keith W. Hughes |
|
|
160,595,259 |
|
|
|
8,293,237 |
|
James K. Hunt |
|
|
162,438,307 |
|
|
|
6,450,189 |
|
Richard N. Massey |
|
|
163,431,539 |
|
|
|
5,456,957 |
|
Directors whose term of office as a director continued after the meeting are as follows:
William P. Foley, II, Thomas M. Hagerty, Daniel D. Lane, David K. Hunt, Cary H. Thompson, Marshall
Haines and Robert M. Clements.
35
The proposal to approve the ratification of the appointment of KPMG LLP as the independent
registered public accounting firm for FIS for 2007 received the following votes:
|
|
|
|
|
|
|
|
|
|
|
Votes |
|
Percentage |
Shares Voted For |
|
|
167,018,469 |
|
|
|
98.9 |
% |
Shares Voted Against |
|
|
1,027,466 |
|
|
|
0.6 |
% |
Shares Voted Abstain |
|
|
842,559 |
|
|
|
0.5 |
% |
Item 6. Exhibits
(a) Exhibits:
31.1 |
|
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|
31.2 |
|
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|
32.1 |
|
Certification by Chief Executive Officer of Periodic Financial Reports pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350. |
|
32.2 |
|
Certification by Chief Financial Officer of Periodic Financial Reports pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350. |
36
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
|
|
|
|
|
Date: August 9, 2007 |
Fidelity National Information Services, Inc.
|
|
|
By: |
/s/ Jeffrey S. Carbiener
|
|
|
|
Jeffrey S. Carbiener |
|
|
|
Executive Vice President and Chief Financial Officer
(Principal Financial Officer and Principal
Accounting Officer) |
|
37
FIDELITY NATIONAL INFORMATION SERVICES, INC.
FORM 10-Q
INDEX TO EXHIBITS
The following documents are being filed with this Report:
|
|
|
Exhibit |
|
|
No. |
|
Description |
31.1
|
|
Certification of Lee A. Kennedy, Chief Executive Officer of Fidelity National
Information Services, Inc., pursuant to rule 13a-14(a) or 15d-14(a) of the
Exchange Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002. |
|
|
|
31.2
|
|
Certification of Jeffrey S. Carbiener, Chief Financial Officer of Fidelity
National Information Services, Inc., pursuant to rule 13a-14(a) or 15d-14(a) of
the Exchange Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002. |
|
|
|
32.1
|
|
Certification of Lee A. Kennedy, Chief Executive Officer of Fidelity National
Information Services, Inc., pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
|
|
|
32.2
|
|
Certification of Jeffrey S. Carbiener, Chief Financial Officer of Fidelity
National Information Services, Inc., pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
38