0001136893-16-000108.txt : 20161102 0001136893-16-000108.hdr.sgml : 20161102 20161102125929 ACCESSION NUMBER: 0001136893-16-000108 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 63 CONFORMED PERIOD OF REPORT: 20160930 FILED AS OF DATE: 20161102 DATE AS OF CHANGE: 20161102 FILER: COMPANY DATA: COMPANY CONFORMED NAME: Fidelity National Information Services, Inc. CENTRAL INDEX KEY: 0001136893 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-BUSINESS SERVICES, NEC [7389] IRS NUMBER: 371490331 FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-16427 FILM NUMBER: 161966954 BUSINESS ADDRESS: STREET 1: 601 RIVERSIDE AVENUE CITY: JACKSONVILLE STATE: FL ZIP: 32204 BUSINESS PHONE: 904-438-6365 MAIL ADDRESS: STREET 1: 601 RIVERSIDE AVENUE CITY: JACKSONVILLE STATE: FL ZIP: 32204 FORMER COMPANY: FORMER CONFORMED NAME: CERTEGY INC DATE OF NAME CHANGE: 20010607 FORMER COMPANY: FORMER CONFORMED NAME: EQUIFAX PS INC DATE OF NAME CHANGE: 20010315 10-Q 1 fis-10xq09x30x2016.htm 10-Q Document

 
 
 
 
 
 
 
 
 
 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_______________________________________________
Form 10-Q
_______________________________________________
x
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
For the quarterly period ended September 30, 2016
Or
o
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
For the transition period from                      to
Commission File No. 001-16427
_______________________________________________
Fidelity National Information Services, Inc.
(Exact name of registrant as specified in its charter)
Georgia
 
37-1490331
(State or other jurisdiction
 
(I.R.S. Employer Identification No.)
of incorporation or organization)
 
 
 
 
 
601 Riverside Avenue
 
 
Jacksonville, Florida
 
32204
(Address of principal executive offices)
 
(Zip Code)
(904) 438-6000
(Registrant’s 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 x NO o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YES x NO o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer x
Accelerated filer o
Non-accelerated filer o
(Do not check if a smaller reporting company)
Smaller reporting company 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 x
As of October 31, 2016, 328,227,867 shares of the Registrant’s Common Stock were outstanding.
 
 
 
 
 
 
 
 
 
 



FORM 10-Q
QUARTERLY REPORT
Quarter Ended September 30, 2016
INDEX
 
Page
 
 
 
 EX 10.1
 
 EX 10.2
 
 EX-31.1
 
 EX-31.2
 
 EX-32.1
 
 EX-32.2
 
 EX-101 INSTANCE DOCUMENT
 
 EX-101 SCHEMA DOCUMENT
 
 EX-101 CALCULATION LINKBASE DOCUMENT
 
 EX-101 DEFINITION LINKBASE DOCUMENT
 
 EX-101 LABELS LINKBASE DOCUMENT
 
 EX-101 PRESENTATION LINKBASE DOCUMENT
 


1




FIDELITY NATIONAL INFORMATION SERVICES, INC.
AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(In millions, except per share amounts)
(Unaudited)
 
September 30, 2016
 
December 31, 2015
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
701

 
$
682

Settlement deposits
467

 
371

Trade receivables, net of allowance for doubtful accounts of $34 and $16 as of
September 30, 2016 and December 31, 2015, respectively
1,649

 
1,731

Settlement receivables
230

 
162

Other receivables
104

 
197

Prepaid expenses and other current assets
290

 
266

Deferred income taxes
82

 
100

Total current assets
3,523

 
3,509

Property and equipment, net
604

 
611

Goodwill
14,569

 
14,745

Intangible assets, net
5,146

 
5,159

Computer software, net
1,639

 
1,584

Deferred contract costs, net
293

 
253

Other noncurrent assets
360

 
339

Total assets
$
26,134

 
$
26,200

LIABILITIES AND EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable and accrued liabilities
$
1,169

 
$
1,196

Settlement payables
699

 
538

Deferred revenues
752

 
615

Current portion of long-term debt
317

 
15

Total current liabilities
2,937

 
2,364

Long-term debt, excluding current portion
10,470

 
11,429

Deferred income taxes
2,629

 
2,658

Deferred revenues
17

 
30

Other long-term liabilities
325

 
312

Total liabilities
16,378

 
16,793

Equity:
 
 
 
FIS stockholders’ equity:
 
 
 
Preferred stock, $0.01 par value, 200 shares authorized, none issued and outstanding as of September 30, 2016 and December 31, 2015

 

Common stock, $0.01 par value, 600 shares authorized, 431 and 430 shares issued as of September 30, 2016 and December 31, 2015, respectively
4

 
4

Additional paid in capital
10,334

 
10,210

Retained earnings
3,177

 
3,073

Accumulated other comprehensive earnings (loss)
(240
)
 
(279
)
Treasury stock, 103 and 106 shares as of September 30, 2016 and December 31, 2015, respectively, at cost
(3,614
)
 
(3,687
)
Total FIS stockholders’ equity
9,661

 
9,321

Noncontrolling interest
95

 
86

Total equity
9,756

 
9,407

Total liabilities and equity
$
26,134

 
$
26,200

See accompanying notes to unaudited condensed consolidated financial statements.

2


FIDELITY NATIONAL INFORMATION SERVICES, INC.
AND SUBSIDIARIES
Condensed Consolidated Statements of Earnings
(In millions, except per share data)
(Unaudited)

 
Three months ended
September 30,
 
Nine months ended
September 30,
 
2016
 
2015
 
2016
 
2015
Processing and services revenues
$
2,309

 
$
1,579

 
$
6,795

 
$
4,721

Cost of revenues
1,527

 
1,022

 
4,680

 
3,162

Gross profit
782

 
557

 
2,115

 
1,559

Selling, general, and administrative expenses
384

 
219

 
1,250

 
719

Operating income
398

 
338

 
865

 
840

Other income (expense):
 
 
 
 
 
 
 
Interest expense, net
(98
)
 
(36
)
 
(284
)
 
(109
)
Other income (expense), net
(6
)
 
(20
)
 
(8
)
 
130

Total other income (expense), net
(104
)
 
(56
)
 
(292
)
 
21

Earnings from continuing operations before income taxes
294

 
282

 
573

 
861

Provision for income taxes
103

 
100

 
200

 
314

Earnings from continuing operations, net of tax
191

 
182

 
373

 
547

Earnings (loss) from discontinued operations, net of tax

 
(2
)
 
1

 
(7
)
Net earnings
191

 
180

 
374

 
540

Net earnings attributable to noncontrolling interest
(6
)
 
(5
)
 
(13
)
 
(14
)
Net earnings attributable to FIS common stockholders
$
185

 
$
175

 
$
361

 
$
526

Net earnings per share — basic from continuing operations attributable to FIS common stockholders
$
0.57

 
$
0.63

 
$
1.11

 
$
1.89

Net earnings (loss) per share — basic from discontinued operations attributable to FIS common stockholders

 
(0.01
)
 

 
(0.02
)
Net earnings per share — basic attributable to FIS common stockholders
$
0.57

 
$
0.62

 
$
1.11

 
$
1.87

Weighted average shares outstanding — basic
326

 
280

 
325

 
282

Net earnings per share — diluted from continuing operations attributable to FIS common stockholders
$
0.56

 
$
0.62

 
$
1.09

 
$
1.87

Net earnings (loss) per share — diluted from discontinued operations attributable to FIS common stockholders

 
(0.01
)
 

 
(0.02
)
Net earnings per share — diluted attributable to FIS common stockholders
$
0.56

 
$
0.62

 
$
1.10

 
$
1.85

Weighted average shares outstanding — diluted
330

 
284

 
329

 
285

Cash dividends paid per share
$
0.26

 
$
0.26

 
$
0.78

 
$
0.78

Amounts attributable to FIS common stockholders:
 
 
 
 
 
 
 
Net earnings from continuing operations
$
185

 
$
177

 
$
360

 
$
533

Net earnings (loss) from discontinued operations

 
(2
)
 
1

 
(7
)
Net earnings attributable to FIS common stockholders
$
185

 
$
175

 
$
361

 
$
526


Amounts in table may not sum due to rounding.
See accompanying notes to unaudited condensed consolidated financial statements.

3



FIDELITY NATIONAL INFORMATION SERVICES, INC.
AND SUBSIDIARIES
Condensed Consolidated Statements of Comprehensive Earnings
(In millions)
(Unaudited)

 
Three months ended September 30,
 
Nine months ended September 30,
 
2016
 
2015
 
2016
 
2015
Net earnings
 
 
$
191

 
 
 
$
180

 
 
 
$
374

 
 
 
$
540

Other comprehensive earnings, before tax:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Unrealized gain (loss) on investments and derivatives
$
3

 
 
 
$
(14
)
 
 
 
$
(6
)
 
 
 
$
(16
)
 
 
Reclassification adjustment for (gains) losses included in net earnings
4

 
 
 
1

 
 
 
8

 
 
 
3

 
 
Unrealized gain (loss) on investments and derivatives, net
7

 
 
 
(13
)
 
 
 
2

 
 
 
(13
)
 
 
Foreign currency translation adjustments
(1
)
 
 
 
(75
)
 
 
 
50

 
 
 
(179
)
 
 
Other comprehensive earnings (loss), before tax:
6

 
 
 
(88
)
 
 
 
52

 
 
 
(192
)
 
 
Provision for income tax expense (benefit) related to items of other comprehensive earnings
2

 
 
 
(6
)
 
 
 
(4
)
 
 
 
(4
)
 
 
Other comprehensive earnings (loss), net of tax
$
4

 
4

 
$
(82
)
 
(82
)
 
$
56

 
56

 
(188
)
 
(188
)
Comprehensive (loss) earnings:
 
 
195

 
 
 
98

 
 
 
430

 
 
 
352

Net (earnings) loss attributable to noncontrolling interest
 
 
(6
)
 
 
 
(5
)
 
 
 
(13
)
 
 
 
(14
)
Other comprehensive (earnings) losses attributable to noncontrolling interest
 
 
1

 
 
 
19

 
 
 
(18
)
 
 
 
34

Comprehensive earnings (loss) attributable to FIS common stockholders
 
 
$
190

 
 
 
$
112

 
 
 
$
399

 
 
 
$
372


See accompanying notes to unaudited condensed consolidated financial statements.





4


FIDELITY NATIONAL INFORMATION SERVICES, INC.
AND SUBSIDIARIES
Condensed Consolidated Statement of Equity
Nine months ended September 30, 2016
(In millions, except per share amounts)
(Unaudited)

 
 
 
 
 
Amount
 
 
 
 
 
FIS Stockholders
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Accumulated
 
 
 
 
 
 
 
Number of shares
 
 
 
Additional
 
 
 
other
 
 
 
 
 
 
 
Common
 
Treasury
 
Common
 
paid in
 
Retained
 
comprehensive
 
Treasury
 
Noncontrolling
 
Total
 
shares
 
shares
 
stock
 
capital
 
earnings
 
earnings
 
stock
 
interest
 
equity
Balances, December 31, 2015
430

 
(106
)
 
$
4

 
$
10,210

 
$
3,073

 
$
(279
)
 
$
(3,687
)
 
$
86

 
$
9,407

Issuance of restricted stock
1

 

 

 

 

 

 

 

 

Exercise of stock options

 
3

 

 
13

 

 

 
75

 

 
88

Treasury shares held for taxes due upon exercise of stock options

 

 

 
(21
)
 

 

 
(6
)
 

 
(27
)
Excess income tax benefit from exercise of stock options

 

 

 
26

 

 

 

 

 
26

Stock-based compensation

 

 

 
101

 

 

 

 

 
101

Cash dividends paid ($0.26 per share per quarter) and other distributions

 

 

 

 
(257
)
 

 

 
(22
)
 
(279
)
Net earnings

 

 

 

 
361

 

 

 
13

 
374

Other comprehensive loss, net of tax

 

 

 

 

 
38

 

 
18

 
56

Other

 

 

 
5

 

 
1

 
4

 

 
10

Balances, September 30, 2016
431

 
(103
)
 
$
4

 
$
10,334

 
$
3,177

 
$
(240
)
 
$
(3,614
)
 
$
95

 
$
9,756

See accompanying notes to unaudited condensed consolidated financial statements.


5


FIDELITY NATIONAL INFORMATION SERVICES, INC.
AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(In millions)
(Unaudited)
 
Nine months ended
September 30,
 
2016
 
2015
Cash flows from operating activities:
 
 
 
Net earnings
$
374

 
$
540

Adjustment to reconcile net earnings to net cash provided by operating activities:
 
 
 
Depreciation and amortization
876

 
464

Amortization of debt issue costs
14

 
7

Gain on Sale of Assets

 
(150
)
Stock-based compensation
101

 
59

Deferred income taxes
(125
)
 
(41
)
Excess income tax benefit from exercise of stock options
(26
)
 
(21
)
Other operating activities

 
4

Net changes in assets and liabilities, net of effects from acquisitions and foreign currency:
 
 
 
Trade receivables
126

 
(34
)
Settlement activity
(4
)
 
7

Prepaid expenses and other assets
(32
)
 
(19
)
Deferred contract costs
(94
)
 
(85
)
Deferred revenue
121

 
(4
)
Accounts payable, accrued liabilities, and other liabilities
11

 
(29
)
Net cash provided by operating activities
1,342

 
698

 
 
 
 
Cash flows from investing activities:
 
 
 
Additions to property and equipment
(110
)
 
(106
)
Additions to computer software
(336
)
 
(200
)
Proceeds from sale of assets

 
241

Acquisitions, net of cash acquired, and equity investments

 
(17
)
Other investing activities, net
(4
)
 

Net cash used in investing activities
(450
)
 
(82
)
 
 
 
 
Cash flows from financing activities:
 
 
 
Borrowings
5,763

 
4,662

Repayment of borrowings
(6,429
)
 
(4,762
)
Debt issuance costs
(20
)
 
(3
)
Excess income tax benefit from exercise of stock options
26

 
21

Proceeds from exercise of stock options
88

 
46

Treasury stock activity
(27
)
 
(308
)
Dividends paid
(255
)
 
(220
)
Distribution to Brazilian Venture partner
(20
)
 
(24
)
Other financing activities, net
(17
)
 
(24
)
Net cash used in financing activities
(891
)
 
(612
)
Effect of foreign currency exchange rate changes on cash
18

 
(55
)
Net increase (decrease) in cash and cash equivalents
19

 
(51
)
Cash and cash equivalents, beginning of period
682

 
493

Cash and cash equivalents, end of period
$
701

 
$
442

 
 
 
 
Supplemental cash flow information:
 
 
 
Cash paid for interest
$
218

 
$
98

Cash paid for income taxes
$
236

 
$
293

See accompanying notes to unaudited condensed consolidated financial statements.

6


FIDELITY NATIONAL INFORMATION SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)


Unless stated otherwise or the context otherwise requires, all references to “FIS,” “we,” the “Company” or the “registrant” are to Fidelity National Information Services, Inc., a Georgia corporation, and its subsidiaries.

(1) Basis of Presentation

The unaudited financial information included in this report includes the accounts of FIS and its subsidiaries prepared in accordance with U.S. 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 Company’s Annual Report on Form 10-K for the year ended December 31, 2015, as updated by the Current Report on Form 8-K dated June 2, 2016 for changes in our reporting segments. The preparation of these Condensed Consolidated Financial Statements (Unaudited) in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the Condensed Consolidated Financial Statements (Unaudited) and the reported amounts of revenues and expenses during the reported periods. Actual results could differ from those estimates. Certain reclassifications have been made in the 2015 Condensed Consolidated Financial Statements (Unaudited) to conform to the classifications used in 2016.

On August 12, 2015, FIS and certain of its wholly-owned subsidiaries entered into an Agreement and Plan of Merger with SunGard and SunGard Capital Corp. II (collectively “SunGard”) pursuant to which, through a series of mergers, FIS acquired SunGard (collectively the "SunGard acquisition"). FIS completed the SunGard acquisition on November 30, 2015 (Note 4) and SunGard's results of operations and financial position are included in the consolidated financial statements from and after the date of acquisition.

We report the results of our operations in three reporting segments: Integrated Financial Solutions (“IFS”), Global Financial Solutions (“GFS”) and Corporate and Other (Note 10).
 
(2) Related Party Transactions

The Company operates a joint venture ("Brazilian Venture") with Banco Bradesco S.A. ("Banco Bradesco"), in which we own a 51% controlling interest, to provide comprehensive, fully-outsourced transaction processing, call center, cardholder support and collection services to multiple card issuing clients in Brazil, including Banco Bradesco. The original accounting for this transaction resulted in the establishment of a contract intangible asset and a liability for amounts payable to the original partner banks upon final migration of their respective card portfolios and achieving targeted volumes (the “Brazilian Venture Notes”). The unamortized contract intangible asset balance as of September 30, 2016 was $92 million. The carrying value of the noncontrolling interest as of September 30, 2016 was $90 million.

The Company recorded revenues of $75 million and $58 million during the three months and $195 million and $183 million during the nine months ended September 30, 2016 and 2015, respectively, from Banco Bradesco. Revenues included $5 million and $(22) million of favorable (unfavorable) currency impact during the three and nine months ended September 30, 2016, respectively, resulting from foreign currency exchange rate fluctuations between the U.S. Dollar and Brazilian Real in 2016 as compared to 2015.

A summary of the Company’s related party receivables and payables is as follows (in millions):

 
 
 
 
September 30,
 
December 31,
Related Party
 
Balance sheet location
 
2016
 
2015
Banco Bradesco
 
Trade receivables
 
$
62

 
$
31

Banco Bradesco
 
Accounts payable and accrued liabilities
 
10

 
9

Banco Bradesco
 
Other long-term liabilities
 
21

 
24


7

FIDELITY NATIONAL INFORMATION SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)



(3) Net Earnings per Share

The basic weighted average shares and common stock equivalents for the three and nine months ended September 30, 2016 and 2015 are computed using the treasury stock method.

The following table summarizes the earnings per share attributable to FIS common stockholders for the three and nine months ended September 30, 2016 and 2015 (in millions, except per share amounts):

 
Three months ended
September 30,
 
Nine months ended
September 30,
 
2016
 
2015
 
2016
 
2015
Net earnings from continuing operations attributable to FIS common stockholders
$
185

 
$
177

 
$
360

 
$
533

Net earnings (loss) from discontinued operations attributable to FIS common stockholders

 
(2
)
 
1

 
(7
)
Net earnings attributable to FIS common stockholders
$
185

 
$
175

 
$
361

 
$
526

Weighted average shares outstanding — basic
326

 
280

 
325

 
282

Plus: Common stock equivalent shares
4

 
4

 
4

 
3

Weighted average shares outstanding — diluted
330

 
284

 
329

 
285

Net earnings per share — basic from continuing operations attributable to FIS common stockholders
$
0.57

 
$
0.63

 
$
1.11

 
$
1.89

Net earnings (loss) per share — basic from discontinued operations attributable to FIS common stockholders

 
(0.01
)
 

 
(0.02
)
Net earnings per share — basic attributable to FIS common stockholders
$
0.57

 
$
0.62

 
$
1.11

 
$
1.87

Net earnings per share — diluted from continuing operations attributable to FIS common stockholders
$
0.56

 
$
0.62

 
$
1.09

 
$
1.87

Net earnings (loss) per share — diluted from discontinued operations attributable to FIS common stockholders

 
(0.01
)
 

 
(0.02
)
Net earnings per share — diluted attributable to FIS common stockholders
$
0.56

 
$
0.62

 
$
1.10

 
$
1.85

 
 
 
 
 
 
 
 
Amounts in table may not sum due to rounding.
 
 
 
 
 
 
 
Options to purchase approximately 1 million shares or less of our common stock for the three months and 7 million and 1 million for the nine months ended September 30, 2016 and 2015, respectively, were not included in the computation of diluted earnings per share because they were anti-dilutive.

(4) Acquisitions

SunGard

FIS completed the SunGard acquisition on November 30, 2015, and SunGard's results of operations and financial position are included in the consolidated financial statements from and after the date of acquisition. The SunGard acquisition increased our existing portfolio of solutions to automate a wide range of complex business processes for financial services institutions and corporate and government treasury departments, adding trading, securities operations, administering investment portfolios, accounting for investment assets, and managing risk and compliance requirements.

Through a series of mergers, FIS acquired 100 percent of the equity of SunGard, for a total purchase price as follows (in millions):

8

FIDELITY NATIONAL INFORMATION SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)


Cash consideration, including SunGard transaction fees paid at closing
$
2,335

Value of stock and vested equity awards exchanged for FIS shares
2,697

Value of vested portion of SunGard stock awards exchanged for FIS awards
47

 
$
5,079


We recorded a preliminary allocation of the purchase price to SunGard tangible and identifiable intangible assets acquired and liabilities assumed based on their estimated fair values as of November 30, 2015. The provisional amounts for intangible assets were based on independent third-party valuations performed. Land and building valuations were based on appraisals performed by certified property appraisers. Goodwill was recorded as the residual amount by which the purchase price exceeded the provisional fair value of the net assets acquired. Our evaluations of the facts and circumstances available as of November 30, 2015 to assign fair values to other assets acquired and liabilities assumed are ongoing, as are our assessments of the economic characteristics of the acquired software and other intangibles. These evaluations may result in changes to the provisional amounts recorded. In accordance with ASU 2015-16, Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments, the financial statements will not be retrospectively adjusted for any measurement-period adjustments that occur in subsequent periods. Rather, we will recognize any adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment is determined. During the nine months ended September 30, 2016, adjustments were recorded to increase the fair values assigned to intangible assets, deferred taxes, other liabilities and property and equipment and to reduce the value assigned to goodwill. We are also required to record, in the same period’s financial statements in which adjustments are recorded, the effect on earnings of changes in depreciation, amortization, or other income effects, if any, as a result of any change to the provisional amounts, calculated as if the accounting adjustment had been completed at the acquisition date. Additional depreciation and amortization of $6 million that would have been recognized in 2015 was recorded in the nine months ended September 30, 2016 related to the changes in provisional values of intangible assets.

The preliminary purchase price allocation, as adjusted for measurement period adjustments recorded through September 30, 2016, is as follows (in millions):

Cash
$
631

Trade receivables, net
526

Other receivables
57

Property and equipment
145

Computer software
674

Intangible assets
4,550

Other assets
67

Goodwill
5,808

Liabilities assumed and noncontrolling interest
(7,379
)
 
$
5,079


The following table summarizes the liabilities assumed in the SunGard acquisition (in millions):
Long-term debt (subsequently retired)
$
4,738

Deferred income taxes
1,767

Deferred revenue
278

Other liabilities and noncontrolling interest
596

 
$
7,379


The gross contractual amount of trade receivables acquired was approximately $546 million. The difference between that total and the provisional amount reflected above represents our best estimate at the acquisition date of the contractual cash flows not expected to be collected. This difference was derived using SunGard's historical bad debts, sales allowances and collection trends.

9

FIDELITY NATIONAL INFORMATION SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)



(5) Discontinued Operations and Other Dispositions

During the second quarter of 2015, we sold certain assets associated with our gaming industry check warranty business, resulting in a pre-tax gain of $139 million, which is included in Other income (expense), net. The sale did not meet the standard necessary to be reported as discontinued operations; therefore, the gain and related prior period earnings remain reported within earnings from continuing operations.

Certain other operations are reported as discontinued in the Condensed Consolidated Statements of Earnings (Unaudited) as previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2015.
  
(6) Condensed Consolidated Financial Statement Details

The following table shows the Company’s condensed consolidated financial statement details as of September 30, 2016 and December 31, 2015 (in millions):

 
September 30, 2016
 
December 31, 2015
 
Cost
 
Accumulated
depreciation and amortization
 
Net
 
Cost
 
Accumulated
depreciation and amortization
 
Net
Property and equipment
$
1,490

 
$
886

 
$
604

 
$
1,396

 
$
785

 
$
611

Intangible assets
$
6,913

 
$
1,767

 
$
5,146

 
$
6,963

 
$
1,804

 
$
5,159

Computer software
$
2,379

 
$
740

 
$
1,639

 
$
2,300

 
$
716

 
$
1,584

       
The Company entered into capital lease obligations of $16 million and less than $1 million during the three months and $18 million and $2 million during the nine months ended September 30, 2016 and 2015, respectively. The assets are included in property and equipment and the remaining capital lease obligations are classified as long-term debt on our Condensed Consolidated Balance Sheets (Unaudited) as of September 30, 2016. Periodic payments are included in repayment of borrowings on the Condensed Consolidated Statements of Cash Flows (Unaudited).

Changes in goodwill during the nine months ended September 30, 2016 are summarized as follows (in millions):
 
Total
Balance, December 31, 2015
$
14,745

Adjustments to SunGard provisional purchase price allocation
(185
)
Foreign currency adjustments
9

Balance, September 30, 2016
$
14,569


As of September 30, 2016, intangible assets, net of amortization, includes $5,004 million of customer relationships and $61 million of finite-lived trademarks, as well as $81 million of non-amortizable assets consisting mainly of indefinite-lived trademarks.  Amortization expense for the quarter related to these intangible assets was $127 million.

Settlement Activity

We manage certain integrated electronic payment services and programs and wealth management processes for our clients that require us to hold and manage client cash balances used to fund their daily settlement activity. Settlement deposits represent funds we hold that were drawn from our clients to facilitate settlement activities. Settlement receivables represent amounts funded by us. Settlement payables consist of settlement deposits from clients, settlement payables to third parties, and outstanding checks related to our settlement activities for which the right of offset does not exist or we do not intend to exercise our right of offset. Our accounting policy for such outstanding checks is to include them in settlement payables on the Condensed Consolidated Balance Sheets (Unaudited) and operating cash flows on the Condensed Consolidated Statements of Cash Flows (Unaudited).
        

10

FIDELITY NATIONAL INFORMATION SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)


(7) Long-Term Debt
Long-term debt as of September 30, 2016 and December 31, 2015, consisted of the following (in millions):
 
September 30, 2016
 
December 31, 2015
2017 Term Loans (1)
$

 
$
1,300

2018 Term Loans (2)
900

 
1,500

Senior Notes due June 2017, interest payable semi-annually at 1.450%
300

 
300

Senior Notes due April 2018, interest payable semi-annually at 2.000%
250

 
250

Senior Notes due October 2018, interest payable semi-annually at 2.850%
750

 
750

Senior Notes due October 2020, interest payable semi-annually at 3.625%
1,750

 
1,750

Senior Notes due August 2021, interest payable semi-annually at 2.250%
750

 

Senior Notes due March 2022, interest payable semi-annually at 5.000%
700

 
700

Senior Notes due October 2022, interest payable semi-annually at 4.500%
500

 
500

Senior Notes due April 2023, interest payable semi-annually at 3.500%
1,000

 
1,000

Senior Notes due June 2024, interest payable semi-annually at 3.875%
700

 
700

Senior Notes due October 2025, interest payable semi-annually at 5.000%
1,500

 
1,500

Senior Notes due August 2026, interest payable semi-annually at 3.000%
1,250

 

Senior Notes due August 2046, interest payable semi-annually at 4.500%
500

 

Revolving Loan (3)
21

 
1,250

Other
(84
)
 
(56
)
 
10,787

 
11,444

Current portion
(317
)
 
(15
)
Long-term debt, excluding current portion
$
10,470

 
$
11,429

__________________________________________
(1)
Interest on the 2017 Term Loans was generally payable at LIBOR plus an applicable margin of up to 1.75% based upon the Company's corporate credit ratings.
(2)
Interest on the 2018 Term Loans is generally payable at LIBOR plus an applicable margin of up to 1.75% based upon the Company's corporate credit ratings. As of September 30, 2016, the weighted average interest rate on the 2018 Term Loans was 1.77%.
(3)
Interest on the Revolving Loan is generally payable at LIBOR plus an applicable margin of up to 1.75% plus an unused commitment fee of up to 0.25%, each based upon the Company's corporate credit ratings. As of September 30, 2016, the weighted average interest rate on the Revolving Loan, excluding fees, was 1.53%.

On August 10, 2016, FIS amended and extended its syndicated credit agreement (the "Credit Agreement") and paid down the balance of $600 million on the 2017 Term Loans. As of September 30, 2016, the Credit Agreement provided total committed capital of $3,000 million in the form of a revolving credit facility (the "Revolving Loan") maturing on August 10, 2021. FIS is also a party to a syndicated term loan agreement (the "Term Loan Agreement" and together with the Credit Agreement the "FIS Credit Agreements"), which as of September 30, 2016 provided term loans of $900 million maturing on November 30, 2018 (the "2018 Term Loans"). As of September 30, 2016, the outstanding principal balance of the Revolving Loan was $21 million, with $2,971 million of borrowing capacity remaining thereunder (net of $8 million in outstanding letters of credit issued under the Revolving Loan).

The obligations of FIS under the FIS Credit Agreements and under all of its outstanding senior notes rank equal in priority and are unsecured. The FIS Credit Agreements and the senior notes remain subject to customary covenants, including, among others, limitations on the payment of dividends by FIS, and events of default.

On August 11, 2016, FIS issued $2,500 million of new senior notes, including $750 million of Senior Notes due in 2021 (the "2021 Notes") that bear interest at 2.250%, $1,250 million of Senior Notes due in 2026 (the "2026 Notes") that bear interest at 3.000% and $500 million of Senior Notes due in 2046 (the "2046 Notes") that bear interest at 4.500%. Net proceeds from the offering, after deducting discounts and underwriting fees, were $2,461 million. FIS used the proceeds to pay down the outstanding balance of its Revolving Loan and partially pay down the 2018 Term Loans.


11

FIDELITY NATIONAL INFORMATION SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)


Due to the extension of the Revolving Loan and issuance of the 2021, 2026, and 2046 Notes, FIS recorded approximately $25 million of deferred financing costs, which will be amortized into interest expense over the life of the loan and notes. Also, as a result of the pay down of the 2017 Term Loans and the partial pay down of the 2018 Term Loans, FIS incurred a pre-tax charge upon extinguishment of approximately $2 million due to the write-off of associated previously capitalized debt issue costs.
      
The following summarizes the aggregate maturities of our debt and capital leases on stated contractual maturities, excluding unamortized non-cash bond premiums and discounts of $36 million as of September 30, 2016 (in millions).

 
 
 
 
 
Total
2016
 
$
3

2017
 
317

2018
 
1,908

2019
 
5

2020
 
1,750

Thereafter
 
6,921

Total principal payments
 
10,904

Debt issuance costs, net of accumulated amortization
 
(81
)
Total long-term debt
 
$
10,823


Voluntary prepayment of the term loans is generally permitted at any time without fee. There are no mandatory principal payments on the Revolving Loan and any balance outstanding on the Revolving Loan will be due and payable at its scheduled maturity date, which occurs at August 10, 2021.

We monitor the financial stability of our counterparties on an ongoing basis. The lender commitments under the undrawn portions of the Revolving Loan are comprised of a diversified set of financial institutions, both domestic and international. The failure of any single lender to perform its obligations under the Revolving Loan would not adversely impact our ability to fund operations.

The fair value of the Company’s long-term debt is estimated to be approximately $523 million higher than the carrying value as of September 30, 2016. This estimate is based on quoted prices of our senior notes and trades of our other debt in close proximity to September 30, 2016, which are considered Level 2-type measurements. This estimate is subjective in nature and involves uncertainties and significant judgment in the interpretation of current market data. Therefore, the values presented are not necessarily indicative of amounts the Company could realize or settle currently.

(8) Financial Instruments

As of September 30, 2016, we have entered into the following interest rate swap transactions converting a portion of the interest rate exposure on our 2018 Term Loans and Revolving Loan from variable to fixed (in millions):

Effective date
 
Termination date
 
Notional amount
 
Bank pays
variable rate of
 
FIS pays
 fixed rate of
January 2016
 
January 2017
 
200

 
1 Month LIBOR (1)
 
0.65
%
(2)
January 2016
 
January 2018
 
500

 
1 Month LIBOR (1)
 
0.92
%
(2)
February 2016
 
February 2017
 
200

 
1 Month LIBOR (1)
 
0.71
%
(2)
 
 
 
 
$
900

 
 
 
 
 
___________________________________
(1)
0.53% in effect as of September 30, 2016.
(2)
Does not include the applicable margin and facility fees paid to lenders on term loans and revolving loans as described above.


12

FIDELITY NATIONAL INFORMATION SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)


We have designated these interest rate swaps as cash flow hedges and, as such, they are carried on the Condensed Consolidated Balance Sheets (Unaudited) at fair value with changes in fair value included in other comprehensive earnings, net of tax.

Due to the term loan and revolver reductions discussed in Note (7) Long-Term Debt, interest rate swaps with a notional amount totaling $850 million were terminated as of September 30, 2016. As a result, FIS recognized an approximate $2 million before tax loss due to the release of fair value changes from other comprehensive earnings.

A summary of the fair value of the Company’s interest rate derivative instruments is as follows (in millions):

 
September 30, 2016
 
December 31, 2015
 
Balance sheet location
 
Fair
value
 
Balance sheet location
 
Fair
value
Interest rate swap contracts
Other noncurrent assets
 
$

 
Other noncurrent assets
 
$
1

Interest rate swap contracts
Accounts payable and accrued liabilities
 

 
Accounts payable and accrued liabilities
 

Interest rate swap contracts
Other long-term liabilities
 
2

 
Other long-term liabilities
 
1


In accordance with the authoritative guidance for fair value measurements, the inputs used to determine the estimated fair value of our interest rate swaps are Level 2-type measurements. We considered our own credit risk and the credit risk of the counterparties when determining the fair value of our interest rate swaps. Adjustments are made to these amounts and to accumulated other comprehensive earnings ("AOCE") within the Condensed Consolidated Statements of Comprehensive Earnings (Unaudited) and Condensed Consolidated Statement of Equity (Unaudited) as the factors that impact fair value change, including current and projected interest rates, time to maturity and required cash transfers/settlements with our counterparties. Periodic actual and estimated settlements with counterparties are recorded to interest expense as a yield adjustment to effectively fix the otherwise variable rate interest expense associated with the Term and Revolving Loans for hedge notional amounts.

A summary of the effect of derivative instruments on the Company’s Condensed Consolidated Statements of Comprehensive Earnings (Unaudited) and recognized in AOCE for the three and nine months ended September 30, 2016 and 2015 are as follows (in millions):

 
 
Amount of gain (loss)
recognized in AOCE on
derivatives
 
 
 
Amount of gain (loss) reclassified
from AOCE into
income
Derivatives in cash
 
Three months ended
 
Location of loss
 
Three months ended
flow hedging
 
September 30,
 
reclassified from
 
September 30,
relationships
 
2016
 
2015
 
AOCE into income
 
2016
 
2015
Interest rate derivative contracts
 
$
3

 
$
(1
)
 
Interest expense
 
$
(4
)
 
$
(1
)

 
 
Amount of gain (loss)
recognized in AOCE on
derivatives
 
 
 
Amount of gain (loss) reclassified
from AOCE into
income
Derivatives in cash
 
Nine months ended
 
Location of loss
 
Nine months ended
flow hedging
 
September 30,
 
reclassified from
 
September 30,
relationships
 
2016
 
2015
 
AOCE into income
 
2016
 
2015
Interest rate derivative contracts
 
$
(9
)
 
$
(4
)
 
Interest expense
 
$
(8
)
 
$
(3
)

Less than $1 million of the balance in AOCE as of September 30, 2016, is expected to be reclassified into income over the next twelve months.


13

FIDELITY NATIONAL INFORMATION SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)


Our existing cash flow hedges are highly effective and there was no impact on earnings due to hedge ineffectiveness. It is our practice to execute such instruments with credit-worthy banks at the time of execution and not to enter into derivative financial instruments for speculative purposes. As of September 30, 2016, we believe that our interest rate swap counterparties will be able to fulfill their obligations under our agreements, and we believe we will have debt outstanding through the various expiration dates of the swaps such that the forecasted transactions remain probable of occurring.

We also use currency forward contracts to manage our exposure to fluctuations in costs caused by variations in Indian Rupee (“INR”) exchange rates. As of September 30, 2016, the notional amount of these derivatives was approximately $14 million and the fair value was nominal. These INR forward contracts are designated as cash flow hedges. The fair value of these currency forward contracts is determined using currency exchange market rates, obtained from reliable, independent, third party banks, at the balance sheet date. The fair value of forward contracts is subject to changes in currency exchange rates. The Company has no ineffectiveness related to its use of currency forward contracts in connection with INR cash flow hedges.

(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 no actions, other than the matters listed below, depart from customary litigation incidental to its 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 all of its litigation on an on-going basis and follows the authoritative provisions for accounting for contingencies when making accrual and disclosure decisions. A liability must be accrued if (a) it is probable that a liability has been incurred and (b) the amount of loss can be reasonably estimated. If one of these criteria has not been met, disclosure is required when there is at least a reasonable possibility that a material loss may be incurred. When assessing reasonably possible and probable outcomes, the Company bases decisions on the assessment of the ultimate outcome following all appeals. Legal fees associated with defending litigation matters are expensed as incurred.

 DataTreasury Corporation v. Fidelity National Information Services, Inc. et. al.

On May 28, 2013, DataTreasury Corporation (the “Plaintiff”) filed a patent infringement lawsuit against the Company and multiple banks in the U.S. District Court for the Eastern District of Texas, Marshall Division.  Plaintiff alleges that the Company infringes the patents at issue by making, using, selling or offering to sell systems and methods for image-based check processing. The Plaintiff seeks damages, injunctive relief and attorneys' fees for the alleged infringement of two patents.  On October 25, 2013, the Company filed for covered business method ("CBM") post-grant reviews of the validity of the Plaintiff's asserted patents at the U.S. Patent and Trademark Office ("USPTO").  The Company filed a Motion to Stay the case pending the outcome of the CBM post-grant reviews. On April 29, 2014, the USPTO instituted the Company's two CBM petitions. On August 14, 2014, the Court granted the Company's Motion to Stay the litigation pending the outcome of the CBM review proceedings. On April 29, 2015, the Patent Trial and Appeal Board ("PTAB") issued final written decisions on the Company’s two CBM petitions holding that all claims of the Plaintiff’s two patents are unpatentable ("Final Written Decisions"). On August 27, 2015, the Plaintiff filed a notice of appeal to the U.S. Court of Appeals for the Federal Circuit of the USPTO’s Final Written Decisions. On October 13, 2016, the Federal Circuit affirmed the USPTO's Final Written Decisions finding the Plaintiff's two patents to be unpatentable. Following this favorable decision, we believe the possibility of an adverse outcome in this matter is remote, and will hereafter discontinue discussing it in our financial statement footnotes absent some unexpected change.

Acquired Contingencies (SunGard)

The Company became responsible for certain contingencies which were assumed in the SunGard acquisition. These matters include unclaimed property examinations and tax compliance matters. The Condensed Consolidated Balance Sheet as of September 30, 2016 includes a liability of $107 million related to these matters. Of this liability, $11 million is considered provisional and is subject to further change as these contingencies are finalized. Changes in this provisional liability during the

14

FIDELITY NATIONAL INFORMATION SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)


measurement period that result from new information about facts and circumstances that existed at the acquisition date are reflected in our purchase accounting for the SunGard acquisition, not through our income statement.

Reliance Trust Claims

Reliance Trust Company, the Company’s subsidiary, is named as a defendant in a class action arising out of its provision of services as the outside trustee for a 401(k) Plan. Plaintiffs in the action seek damages and attorneys’ fees, as well as equitable relief, for alleged breaches of fiduciary duty and prohibited transactions under the Employee Retirement Income Security Act of 1974. The action also makes claims against the Plan's sponsor and recordkeeper. Reliance Trust Company is vigorously defending the action and believes that it has meritorious defenses. While we believe that the ultimate resolution of the matter will not have a material impact on our financial condition, we are unable at this time to make an estimate of potential losses arising from the action because the matter is at an early state and involves unresolved questions of fact and law.


Brazilian Tax Authorities Claims

In 2004, Proservvi Empreendimentos e Servicos, Ltda., the predecessor to Fidelity National Servicos de Tratamento de Documentos e Informatica Ltda. (“Servicos”), a subsidiary of Fidelity National Participacoes Ltda., our former item processing and remittance services operation in Brazil, acquired certain assets and employees and leased certain facilities from the Transpev Group (“Transpev”) in Brazil. Transpev’s remaining assets were later acquired by Prosegur, an unrelated third party. When Transpev discontinued its operations after the asset sale to Prosegur, it had unpaid federal taxes and social contributions owing to the Brazilian tax authorities. The Brazilian tax authorities brought a claim against Transpev and beginning in 2012 brought claims against Prosegur and Servicos on the grounds that Prosegur and Servicos were successors in interest to Transpev. To date, the Brazilian tax authorities filed nine claims against Servicos asserting potential tax liabilities of approximately $14 million. There are potentially 27 additional claims against Transpev/Prosegur for which Servicos is named as a co-defendant or may be named, but for which Servicos has not yet been served. These additional claims amount to approximately $58 million making the total potential exposure for all 36 claims approximately $72 million. We do not believe a liability for these 36 total claims is probable or reasonably estimable and, therefore, have not recorded a liability for any of these claims.

Indemnifications and Warranties

The Company generally indemnifies its customers, subject to certain limitations and exceptions, against damages and costs resulting from claims of patent, copyright, or trademark infringement associated solely with its customers' use of the Company's software applications or services. Historically, the Company has not made any material payments under such indemnifications, but continues to monitor the conditions that are subject to the indemnifications to identify whether it is probable that a loss has occurred, and would recognize any such losses when they are estimable. In addition, the Company warrants to customers that its software operates substantially in accordance with the software specifications. Historically, no material costs have been incurred related to software warranties and no accruals for warranty costs have been made.

(10) Segment Information

In 2015, FIS finalized a reorganization and began reporting its financial performance based on three segments: Integrated Financial Solutions (“IFS”), Global Financial Solutions (“GFS”) and Corporate and Other. We recast all previous periods to conform to the new segment presentation. Following the November 30, 2015 SunGard acquisition, SunGard was included within the GFS segment as its economic characteristics, international business model, and various other factors largely aligned with those of our GFS segment. As we have further integrated the businesses in 2016, we have reclassified certain SunGard solutions that are oriented more to the retail banking and payments activities of IFS into that segment (corporate liquidity and wealth management). Certain other non-strategic businesses from both SunGard (public sector and education) and legacy FIS (commercial services and check processing) have been reclassified to the Corporate and Other segment, as have SunGard administrative expenses. Prior periods have been reclassified to conform to the current segment presentation.
   
Adjusted EBITDA is defined as EBITDA (defined as net income (loss) before net interest expense, income tax provision (benefit) and depreciation and amortization, including amortization of purchased intangibles), plus certain non-operating items. This measure is reported to the chief operating decision maker for purposes of making decisions about allocating resources to the segments and assessing their performance. For this reason, Adjusted EBITDA, as it relates to our segments, is presented in

15

FIDELITY NATIONAL INFORMATION SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)


conformity with Accounting Standards Codification 280, Segment Reporting. The non-operating items affecting the segment profit measure generally include acquisition accounting adjustments, acquisition, integration and severance costs, and restructuring expenses. For consolidated reporting purposes, these costs and adjustments are recorded in the Corporate and Other segment for the periods discussed below. Adjusted EBITDA for the respective segments excludes the foregoing costs and adjustments.

Summarized financial information for the Company’s segments is shown in the following tables.

As of and for the three months ended September 30, 2016 (in millions):

 
IFS
 
GFS
 
Corporate
and Other
 
Total
Processing and services revenues
$
1,124

 
$
1,068

 
$
117

 
$
2,309

Operating expenses
738

 
789

 
384

 
1,911

Depreciation and amortization from continuing operations
71

 
64

 
13

 
148

Purchase accounting amortization

 

 
144

 
144

EBITDA
457

 
343

 
(110
)
 
690

Acquisition deferred revenue adjustment

 

 
37

 
37

Acquisition, integration and severance costs

 

 
39

 
39

Adjusted EBITDA
$
457

 
$
343

 
$
(34
)
 
766

 
 
 
 
 
 
 
 
EBITDA
 
 
 
 
 
 
$
690

Interest expense
 
 
 
 
 
 
98

Depreciation and amortization from continuing operations
 
 
 
 
 
 
148

Purchase accounting amortization
 
 
 
 
 
 
144

Other income (expense) unallocated
 

 
 

 
 

 
(6
)
Provision for income taxes
 
 
 
 
 
 
103

Net earnings from discontinued operations
 
 
 
 
 
 

Net earnings attributable to noncontrolling interest
 
 
 
 
 
 
6

Net earnings attributable to FIS common stockholders


 


 


 
$
185

Capital expenditures (1)
$
82

 
$
79

 
$
8

 
$
169

Total assets (2)
$
10,179

 
$
9,131

 
$
6,820

 
$
26,130

Goodwill
$
7,670

 
$
6,443

 
$
456

 
$
14,569


(1)
Capital expenditures for the three months ended September 30, 2016 include $16 million of capital leases.
(2)
Total assets as of September 30, 2016 exclude $4 million related to discontinued operations.

As of and for the three months ended September 30, 2015 (in millions):


16

FIDELITY NATIONAL INFORMATION SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)


 
IFS
 
GFS
 
Corporate
and Other
 
Total
Processing and services revenues
$
944

 
$
539

 
$
96

 
$
1,579

Operating expenses
598

 
432

 
211

 
1,241

Depreciation and amortization from continuing operations
58

 
34

 
13

 
105

Purchase accounting amortization

 

 
50

 
50

EBITDA
404

 
141

 
(52
)
 
493

Acquisition, integration and severance costs

 

 
36

 
36

Adjusted EBITDA
$
404

 
$
141

 
$
(16
)
 
$
529

 
 
 
 
 
 
 
 
EBITDA
 
 
 
 
 
 
$
493

Interest expense
 
 
 
 
 
 
36

Depreciation and amortization from continuing operations
 
 
 
 
 
 
105

Purchase accounting amortization
 
 
 
 
 
 
50

Other income (expense) unallocated
 
 
 
 
 
 
(20
)
Provision for income taxes
 
 
 
 
 
 
100

Net loss from discontinued operations
 
 
 
 
 
 
(2
)
Net earnings attributable to noncontrolling interest
 
 
 
 
 
 
5

Net earnings attributable to FIS common stockholders
 
 
 
 
 
 
$
175

Capital expenditures
$
47

 
$
37

 
$
3

 
$
87

Total assets (1)
$
8,701

 
$
3,610

 
$
1,876

 
$
14,187

Goodwill
$
6,636

 
$
1,963

 
$
163

 
$
8,762

 
(1)
Total assets as of September 30, 2015 exclude $1 million related to discontinued operations.

For the nine months ended September 30, 2016 (in millions):

17

FIDELITY NATIONAL INFORMATION SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)


 
IFS
 
GFS
 
Corporate
and Other
 
Total
Processing and services revenues
$
3,407

 
$
3,106

 
$
282

 
$
6,795

Operating expenses
2,279

 
2,415

 
1,236

 
5,930

Depreciation and amortization from continuing operations
204

 
183

 
44

 
431

Purchase accounting amortization
1

 
6

 
438

 
445

EBITDA
1,333

 
880

 
(472
)
 
1,741

Acquisition deferred revenue adjustment

 

 
177

 
177

Acquisition, integration and severance costs

 

 
181

 
181

Adjusted EBITDA
1,333

 
880

 
(114
)
 
2,099

 
 
 
 
 
 
 
 
EBITDA
 
 
 
 
 
 
1,741

Interest expense
 
 
 
 
 
 
284

Depreciation and amortization from continuing operations
 
 
 
 
 
 
431

Purchase accounting amortization
 
 
 
 
 
 
445

Other income (expense) unallocated
 
 
 
 
 
 
(8
)
Provision for income taxes
 
 
 
 
 
 
200

Net earnings from discontinued operations
 
 
 
 
 
 
1

Net earnings attributable to noncontrolling interest
 
 
 
 
 
 
13

Net earnings attributable to FIS common stockholders
 
 
 
 
 
 
$
361

Capital expenditures (1)
$
212

 
$
221

 
$
31

 
$
464

(1)
Capital expenditures for the nine months ended September 30, 2016 include $18 million of capital leases.
          
For the nine months ended September 30, 2015 (in millions):

 
IFS
 
GFS
 
Corporate
and Other
 
Total
Processing and services revenues
$
2,803

 
$
1,606

 
$
312

 
$
4,721

Operating expenses
1,825

 
1,371

 
685

 
3,881

Depreciation and amortization from continuing operations
166

 
104

 
43

 
313

Purchase accounting amortization

 

 
150

 
150

EBITDA
1,144

 
339

 
(180
)
 
1,303

Acquisition, integration and severance costs

 

 
59

 
59

Global restructure

 

 
45

 
45

Adjusted EBITDA
$
1,144

 
$
339

 
$
(76
)
 
$
1,407

 
 
 
 
 
 
 
 
EBITDA
 
 
 
 
 
 
$
1,303

Interest expense
 
 
 
 
 
 
109

Depreciation and amortization from continuing operations
 
 
 
 
 
 
313

Purchase accounting amortization
 
 
 
 
 
 
150

Other income (expense) unallocated
 
 
 
 
 
 
130

Provision for income taxes
 
 
 
 
 
 
314

Net loss from discontinued operations
 
 
 
 
 
 
(7
)
Net earnings attributable to noncontrolling interest
 
 
 
 
 
 
14

Net earnings attributable to FIS common stockholders
 
 
 
 
 
 
$
526

Capital expenditures (1)
$
174

 
$
122

 
$
12

 
$
308


18

FIDELITY NATIONAL INFORMATION SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)


(1)
Capital expenditures for the nine months ended September 30, 2015 include $2 million of capital leases.

Clients in Brazil, the United Kingdom, France and Germany accounted for the majority of the revenues from clients based outside of North America for all periods presented. Long-term assets, excluding goodwill and other intangible assets, located outside of the United States total $527 million and $359 million as of September 30, 2016 and 2015, respectively. These assets are predominantly located in Brazil, India, Germany and the United Kingdom.

Integrated Financial Solutions ("IFS")

The IFS segment is primarily focused on serving the North American regional and community bank market for transaction and account processing, payment solutions, channel solutions (including lending and wealth management solutions), digital channels, risk and compliance solutions, and services, capitalizing on the continuing trend to outsource these solutions. IFS also includes corporate liquidity and wealth management solutions acquired in the SunGard acquisition. IFS’ primary software applications function as the underlying infrastructure of a financial institution's processing environment. These applications include core bank processing software, which banks use to maintain the primary records of their customer accounts, and complementary applications and services that interact directly with the core processing applications. Clients in this segment include regional and community banks, credit unions, commercial lenders, independent community and savings institutions as well as government institutions, merchants and other commercial organizations. This market is primarily served through integrated solutions and characterized by multi-year processing contracts that generate highly recurring revenues. The predictable nature of cash flows generated from this segment provides opportunities for further investments in innovation, product integration, information and security, and compliance in a cost effective manner.

Global Financial Solutions ("GFS")

The GFS segment is focused on serving the largest financial institutions around the globe with banking and payments solutions, as well as consulting and transformation services. The GFS segment has extended its reach through the SunGard acquisition, and now also delivers a broader array of capital markets and asset management and insurance solutions and services. We have two operating segments within GFS, International Banking & Payments and Institutional & Wholesale, which are differentiated by solution type and have been aggregated to form the Global Financial Solutions reportable segment. International Banking & Payments provides solutions designed to meet the needs of the retail banking customers of global and international financial institutions, while Institutional & Wholesale is focused primarily on providing non-retail solutions to the global financial institutions we serve.

GFS clients include the largest global financial institutions, including those headquartered in the United States, as well as all international financial institutions we serve as clients in more than 130 countries around the world. These institutions face unique business and regulatory challenges and account for the majority of financial institution information technology spend globally. The purchasing patterns of GFS clients vary from those of IFS clients who typically purchase solutions on an outsourced basis. GFS clients purchase our solutions and services in various ways including licensing and managing technology “in-house”, using consulting and third party service providers as well as fully outsourced end-to-end solutions. We have long-established relationships with many of these financial institutions that generate significant recurring revenue. GFS clients now also include asset managers, buy- and sell-side securities and trading firms, insurers and private equity firms due to the addition of SunGard. This segment also includes the Company's consolidated Brazilian Venture (Note 2).

Corporate and Other

The Corporate and Other segment consists of corporate overhead expense, certain leveraged functions and miscellaneous expenses that are not included in the operating segments as well as certain non-strategic businesses. The overhead and leveraged costs relate to marketing, corporate finance and accounting, human resources, legal, and amortization of acquisition-related intangibles and other costs that are not considered when management evaluates revenue generating segment performance, such as acquisition integration and severance costs. The Corporate and Other segment also includes the purchase accounting impact on revenue for 2016 of adjusting SunGard's deferred revenue as of the acquisition date to fair value.


19


ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Unless stated otherwise or the context otherwise requires, all references to “FIS,” “we,” the “Company” or the “registrant” are to Fidelity National Information Services, Inc., a Georgia corporation, and its subsidiaries.

The following discussion should be read in conjunction with Item 1: Condensed Consolidated Financial Statements (Unaudited) and the Notes thereto included elsewhere in this report. The statements contained in this Form 10-Q or in our other documents or in oral presentations or other statements made by our management that are not purely historical are forward-looking statements within the meaning of the U.S. federal securities laws. Statements that are not historical facts, including statements about anticipated financial outcomes, including any earnings guidance of the Company, business and market conditions, outlook, foreign currency exchange rates, expected dividends and share repurchases, the Company’s sales pipeline and anticipated profitability and growth, as well as other statements about our expectations, hopes, intentions, or strategies regarding the future, are forward-looking statements. These statements relate to future events and our future results and involve a number of risks and uncertainties. Forward-looking statements are based on management’s beliefs, as well as assumptions made by, and information currently available to, management. Any statements that refer to beliefs, expectations, projections or other characterizations of future events or circumstances and other statements that are not historical facts are forward-looking statements. In many cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” or “continue,” or the negative of these terms and other comparable terminology.

Actual results, performance or achievement could differ materially from those contained in these forward-looking statements. The risks and uncertainties that forward-looking statements are subject to include, without limitation:
 
the risk that acquired businesses will not be integrated successfully, or that the integration will be more costly or more time-consuming and complex than anticipated;
the risk that cost savings and other synergies anticipated to be realized from acquisitions may not be fully realized or may take longer to realize than expected;
the risk of doing business internationally;
changes in general economic, business and political conditions, including the possibility of intensified international hostilities, acts of terrorism, changes in either or both the United States and international lending, capital and financial markets and currency fluctuations;
the effect of legislative initiatives or proposals, statutory changes, governmental or other applicable regulations and/or changes in industry requirements, including privacy regulations;
the risks of reduction in revenue from the elimination of existing and potential customers due to consolidation in, or new laws or regulations affecting, the banking, retail and financial services industries or due to financial failures or other setbacks suffered by firms in those industries;
changes in the growth rates of the markets for our solutions;
failures to adapt our solutions to changes in technology or in the marketplace;
internal or external security breaches of our systems, including those relating to unauthorized access, theft, corruption or loss of personal information and computer viruses and other malware affecting our software or platforms, and the reactions of customers, card associations, government regulators and others to any such events;
the risk that implementation of software (including software updates) for customers or at customer locations may result in the corruption or loss of data or customer information, interruption of business operations, exposure to liability claims or loss of customers;
the reaction of current and potential customers to communications from us or regulators regarding information security, risk management, internal audit or other matters;
competitive pressures on pricing related to our solutions including the ability to attract new, or retain existing, customers;
an operational or natural disaster at one of our major operations centers; and
other risks detailed elsewhere in this document, and in our other filings with the Securities and Exchange Commission.

Other unknown or unpredictable factors also could have a material adverse effect on our business, financial condition, results of operations and prospects. Accordingly, readers should not place undue reliance on these forward-looking statements. These forward-looking statements are inherently subject to uncertainties, risks and changes in circumstances that are difficult to predict. Except as required by applicable law or regulation, we do not undertake (and expressly disclaim) any obligation and do not intend to publicly update or review any of these forward-looking statements, whether as a result of new information, future

20


events or otherwise. You should carefully consider the possibility that actual results may differ materially from our forward-looking statements.
    
 Overview

FIS is a global leader in financial services technology with a focus on retail and institutional banking, payments, asset and wealth management, risk and compliance, consulting and outsourcing solutions. Through the depth and breadth of our solutions portfolio, global capabilities and domain expertise, FIS serves more than 20,000 clients in over 130 countries. Headquartered in Jacksonville, Florida, FIS employs more than 55,000 people worldwide and holds global leadership positions in payment processing, financial software and banking solutions. Providing software, services and outsourcing of the technology that empowers the financial world, FIS is a Fortune 500 company and is a member of Standard & Poor’s 500® Index.

We have grown organically as well as through acquisitions, which have contributed critical applications and services that complement or enhance our existing offerings, diversifying our revenues by customer, geography and service offering. The completion of the SunGard acquisition on November 30, 2015 increased our existing portfolio to include solutions that automate a wide range of complex business processes for financial services institutions and corporate and government treasury departments.

In 2015, FIS finalized a reorganization and began reporting its financial performance based on three segments: Integrated Financial Solutions (“IFS”), Global Financial Solutions (“GFS”) and Corporate and Other. We recast all previous periods to conform to the new segment presentation. Following the November 30, 2015 SunGard acquisition, SunGard was included within the GFS segment as its economic characteristics, international business model, and various other factors largely aligned with those of our GFS segment. As we have further integrated the businesses in 2016, we have reclassified certain SunGard businesses that are oriented more to the retail banking and payments activities of IFS into that segment (corporate liquidity and wealth management). Certain other non-strategic businesses from both SunGard (public sector and education) and legacy FIS (commercial services and check processing) have been reclassified to the Corporate and Other segment, as have SunGard administrative expenses. Prior periods also have been reclassified to conform to the current segment presentation. A description of these segments is included in Note 10. Revenues by segment and the adjusted EBITDA of our segments are discussed below in Segment Results of Operations.
Business Trends and Conditions

Our revenue is primarily derived from a combination of recurring technology and processing services, consulting and professional services and software license fees. The majority of our revenue has historically been recurring, and has been provided under multi-year contracts that contribute relative stability to our revenue stream. These services, in general, are considered critical to our clients' operations. A significant portion of these recurring revenues is derived from transaction processing fees that fluctuate with the level of deposit accounts and card transactions, among other variable measures, associated with consumer and commercial activity. Consulting and professional services revenues are typically non-recurring, and sales of software licenses are less predictable, a portion of which can be regarded as discretionary spending by our clients. In the second half of 2015 and through the first nine months of 2016, we experienced the macroeconomic challenges related to the slowdown of the global economy. That trend impacts us predominantly in the amount our clients spend with us for professional services. We expect this trend to continue through the end of 2016.

The SunGard acquisition broadened our solution portfolio, enabling us to expand beyond our traditional banking and payments markets into the institutional and wholesale side of financial institutions as well as other buy-side organizations. It significantly expanded our existing solutions and client base in wealth management, treasury and corporate payments. These solutions are in demand among our regional and community financial institution clients as they look for ways to replace highly regulated fee revenues. The combination also favorably impacts our revenue mix, with a greater concentration of license revenues and higher margin services. Our revenues for the first nine months of 2016 included a $177 million reduction of revenue as a result of the purchase accounting adjustment to reduce SunGard's deferred revenue to fair value. Similar reductions will be experienced throughout 2016 as the acquired deferred revenue balance runs off. Amortization of intangible assets acquired in the SunGard acquisition increased our cost of revenues by $352 million for the first nine months of 2016. Amortization charges will continue to be recorded at varying rates through 2025. As we integrate SunGard into our existing operations, we anticipate significant cost savings in administration and technology expenses, with a goal of achieving annual synergy run-rate savings of $200 million by the end of 2017. Certain one-time severance and other costs have been and will be incurred related to delivering these run-rate savings.
 

21


We are actively migrating a number of our financial institution clients to outsourced integrated technology solutions to improve their profitability and rapidly address increasing regulatory requirements. As a provider of outsourcing solutions, we benefit from multi-year recurring revenue streams, which help moderate the effects of broader year-to-year economic and market changes that otherwise might have a larger impact on our results of operations. We believe our integrated solutions and outsourced services are well-positioned to address this outsourcing trend across the markets we serve.

A realignment of resources in our GFS segment resulted in severance costs of $45 million in the first quarter of 2015. The realignment activities were a combination of optimizing on-shore and off-shore resources as well as the removal of overlapping management resources.

Consumer preference continues to shift from traditional branch banking services to digital banking solutions, and our clients seek to provide a single integrated banking experience through their branch, mobile, internet and voice-banking channels. We are focused on enabling our clients to deliver this experience to their customers through our integrated solutions and services. We continue to develop and invest in these integrated solutions and services to assist clients as they address this market demand.
We continue to see demand for innovative solutions in the payments market that will deliver faster, more convenient payment solutions in mobile channels, internet applications and cards. We believe mobile payments will grow and partially replace existing payment tender volumes over time as consumers and merchants embrace the convenience, incremental services and benefits. Mobile payment volume is growing significantly but does not yet represent a meaningful amount of the payments market. Additionally, new formidable non-traditional payments competitors and large merchants are investing in and innovating mobile payment technologies to address the emerging market opportunity, and it is unclear the extent to which particular technologies or services will succeed. We believe the growth of mobile payments continues to present both an opportunity and a risk to us as the market develops. Although we cannot predict which mobile payment technologies or solutions will be successful, we cautiously believe our client relationships, payments infrastructure and experience, adapted solutions and emerging solutions are well-positioned to maintain or grow our clients' existing payment volumes, which is our focus.
High profile North American merchant payment card information security breaches have pushed the payment card industry towards Europay, MasterCard and VISA ("EMV") integrated circuit cards as financial institutions, card networks and merchants seek to improve information security and reduce fraud costs. We have invested in our card management solutions and card manufacturing and processing capabilities to accommodate EMV integrated circuit cards so we can guide our clients through this technology transition and grow our card-driven businesses. We believe the trend to migrate to EMV cards will continue through the rest of 2016.

The use of checks continues to decline as a percentage of total payments, which negatively impacts our check warranty and item-processing businesses, and we expect this trend to continue. In 2015 and through the first nine months of 2016, we observed a modest slowdown in our check volume decline and to date have been able to successfully mitigate the majority of the impacts of this decline through cost and fraud efficiency actions and new market solutions, which remain our continued focus.
We anticipate consolidation within the banking industry will continue, primarily in the form of merger and acquisition activity, which we believe as a whole is detrimental to our business. However, consolidation resulting from specific merger and acquisition transactions may be beneficial to our business. When consolidations of financial institutions occur, merger partners often operate systems licensed from competing service providers. The newly formed entity generally makes a determination to migrate its core and payments systems to a single platform. When a financial institution processing client is involved in a consolidation, we may benefit by their expanding the use of our services if such services are chosen to survive the consolidation and support the newly combined entity. Conversely, we may lose revenue if we are providing services to both entities, or if a client of ours is involved in a consolidation and our services are not chosen to survive the consolidation and support the newly combined entity. It is also possible that larger financial institutions resulting from consolidation may have greater leverage in negotiating terms or could decide to perform in-house some or all of the services that we currently provide or could provide. We seek to mitigate the risks of consolidations by offering other competitive services to take advantage of specific opportunities at the surviving company.

Notwithstanding challenging global economic conditions, our international business continued to experience growth across all major regions, including Europe and Asia, on a constant currency basis during the first nine months of 2016. By comparison with FIS, a greater percentage of SunGard's revenues have been concentrated historically in international markets, which has contributed to this growth trend. Demand for our solutions will also continue to be driven in developing countries by government-led financial inclusion policies aimed to reduce the unbanked population and by growth in the middle classes in

22


these markets driving the need for more sophisticated banking solutions. The majority of our European revenue is generated by clients in the United Kingdom, France and Germany. In 2015, we experienced adverse currency impacts in our international businesses as a consequence of a relative strengthening of the U.S. dollar.

Globally, attacks on information technology systems continue to grow in frequency, complexity and sophistication. This is a trend we expect to continue. Such attacks have become a point of focus for individuals, businesses and governmental entities. The objectives of these attacks include, among other things, gaining unauthorized access to systems to facilitate financial fraud, disrupting operations, causing denial of service events, corrupting data, and stealing non-public information. These circumstances present both a threat and an opportunity for FIS. As part of our business, we electronically receive, process, store and transmit a wide range of confidential information, including sensitive customer information and personal consumer data. We also operate payment, cash access and prepaid card systems.

FIS remains focused on making strategic investments in information security to protect our clients and our information systems. This includes both capital expenditures and operating expenses on hardware, software, personnel and consulting services. We also participate in industry and governmental initiatives to improve information security for our clients. Through the expertise we have gained with this ongoing focus and involvement, we have developed fraud, security, risk management and compliance solutions to target this growth opportunity in the financial services industry.
  
Critical Accounting Policies

There have been no significant changes to our critical accounting policies as disclosed in our Annual Report on Form 10-K for the year ended December 31, 2015.

Transactions with Related Parties

See Note 2 to the Notes to Condensed Consolidated Financial Statements (Unaudited) for a detailed description of transactions with related parties.
     

23


Comparisons of three-month and nine-month periods ended September 30, 2016 and 2015

Consolidated Results of Operations (Unaudited)
(in millions, except per share amounts)

 
Three months ended
September 30,
 
Nine months ended
September 30,
 
2016
 
2015
 
2016
 
2015
Processing and services revenues
$
2,309

 
$
1,579

 
$
6,795

 
$
4,721

Cost of revenues
1,527

 
1,022

 
4,680

 
3,162

Gross profit
782

 
557

 
2,115

 
1,559

Selling, general, and administrative expenses
384

 
219

 
1,250

 
719

Operating income
398

 
338

 
865

 
840

Other income (expense):
 
 
 
 
 
 
 
Interest expense, net
(98
)
 
(36
)
 
(284
)
 
(109
)
Other income (expense), net
(6
)
 
(20
)
 
(8
)
 
130

Total other income (expense), net
(104
)
 
(56
)
 
(292
)
 
21

Earnings from continuing operations before income taxes
294

 
282

 
573

 
861

Provision for income taxes
103

 
100

 
200

 
314

Earnings from continuing operations, net of tax
191

 
182

 
373

 
547

Earnings (loss) from discontinued operations, net of tax

 
(2
)
 
1

 
(7
)
Net earnings
191

 
180

 
374

 
540

Net earnings attributable to noncontrolling interest
(6
)
 
(5
)
 
(13
)
 
(14
)
Net earnings attributable to FIS common stockholders
$
185

 
$
175

 
$
361

 
$
526

Net earnings per share — basic from continuing operations attributable to FIS common stockholders
$
0.57

 
$
0.63

 
$
1.11

 
$
1.89

Net earnings (loss) per share — basic from discontinued operations attributable to FIS common stockholders

 
(0.01
)
 

 
(0.02
)
Net earnings per share — basic attributable to FIS common stockholders
$
0.57

 
$
0.62

 
$
1.11

 
$
1.87

Weighted average shares outstanding — basic
326

 
280

 
325

 
282

Net earnings per share — diluted from continuing operations attributable to FIS common stockholders
$
0.56

 
$
0.62

 
$
1.09

 
$
1.87

Net earnings (loss) per share — diluted from discontinued operations attributable to FIS common stockholders

 
(0.01
)
 

 
(0.02
)
Net earnings per share — diluted attributable to FIS common stockholders
$
0.56

 
$
0.62

 
$
1.10

 
$
1.85

Weighted average shares outstanding — diluted
330

 
284

 
329

 
285

Amounts attributable to FIS common stockholders:
 
 
 
 
 
 
 
Net earnings from continuing operations
$
185

 
$
177

 
$
360

 
$
533

Net earnings (loss) from discontinued operations

 
(2
)
 
1

 
(7
)
Net earnings attributable to FIS
$
185

 
$
175

 
$
361

 
$
526

Amounts in table may not sum due to rounding.
 
 
 
 
 
 
 

 Processing and Services Revenues

Processing and services revenues totaled $2,309 million and $1,579 million during the three-month periods and $6,795 million and $4,721 million during the nine-month periods ended September 30, 2016 and 2015, respectively. Processing and services revenues for the three-month and nine-month periods ended September 30, 2016 included approximately $16 million and $80 million, respectively of unfavorable foreign currency impact, primarily resulting from a stronger U.S. Dollar versus the British Pound Sterling and during the nine-month period ended September 30, 2016, the Brazilian Real. Excluding the unfavorable foreign currency impact, revenue increases for the three and nine months ended September 30, 2016 as compared

24


to 2015 were primarily attributable to incremental revenues from the SunGard acquisition, growth in debit payments and card production activities associated with the roll-out of EMV across the industry, growth in output solutions, and demand for risk and compliance solutions. Our revenues included a $37 million and $177 million reduction of revenue during the three and nine months ended September 30, 2016, respectively, as a result of the purchase accounting adjustment to reduce SunGard acquired deferred revenue to fair value. See "Segment Results of Operations (Unaudited)" under Item 2 of this Quarterly Report for more detailed explanation.

Cost of Revenues and Gross Profit

Cost of revenues totaled $1,527 million and $1,022 million during the three-month periods and $4,680 million and $3,162 million during the nine-month periods ended September 30, 2016 and 2015, respectively, resulting in gross profit of $782 million and $557 million during the respective three-month periods and $2,115 million and $1,559 million during the nine-month periods. Gross profit as a percentage of revenues was 33.9% and 35.3% during the three-month periods and 31.1% and 33.0% during the nine-month periods ended September 30, 2016 and 2015, respectively. The change in gross profit during the 2016 period as compared to 2015 primarily resulted from the revenue variances noted above. The gross profit percentages during the three-months and nine-months ended September 30, 2016 as compared to the 2015 periods were negatively impacted by higher acquired intangible asset amortization expense resulting from the SunGard acquisition. This negative impact was partially offset by the addition of higher margin revenues from SunGard as well as on-going operating leverage in key markets outside of North America.

Selling, General and Administrative Expenses

Selling, general and administrative expenses totaled $384 million and $219 million during the three-month periods and $1,250 million and $719 million during the nine-month peiods ended September 30, 2016 and 2015, respectively. The year-over-year increases primarily resulted from incremental expenses from SunGard, including integration and severance.

Operating Income

Operating income totaled $398 million and $338 million during the three-month periods and $865 million and $840 million during the nine-month periods ended September 30, 2016 and 2015, respectively. Operating income as a percentage of revenue (“operating margin”) was 17.2% and 21.4% during the three-month periods and 12.7% and 17.8% during the nine-month periods ended September 30, 2016 and 2015, respectively. The changes in operating income for the three and nine-month periods of 2016 as compared to 2015 resulted from the variances addressed above. The decrease in operating margin resulted primarily from higher acquired intangible asset amortization expense and other incremental integration and severance costs.
 
Total Other Income (Expense), Net

Total other income (expense), net was $(104) million and $(56) million during the three-month periods and $(292) million and $21 million during the nine-month periods ended September 30, 2016 and 2015, respectively. Interest expense, net increased $62 million during the three-month period and $175 million during the nine-month period ended September 30, 2016 as compared to 2015 primarily due to higher outstanding debt associated with financing the SunGard acquisition. During the second quarter of 2015, we sold certain assets associated with our gaming industry check warranty business, resulting in proceeds of $238 million and a pre-tax gain of $139 million, which is included in Other income (expense), net during the nine months ended September 30, 2015.

Provision for Income Taxes

Income tax expense from continuing operations totaled $103 million and $100 million during the three-month periods and $200 million and $314 million during the nine-month periods ended September 30, 2016 and 2015, resulting in effective tax rates from continuing operations of 35% and 36% for the three month periods and 35% and 36% for the nine month periods, respectively. The effective tax rate during the nine months ended September 30, 2015 included a $90.1 million write-off of goodwill with no tax basis in connection with the sale of our gaming industry check warranty business.

Earnings from Continuing Operations, Net of Tax, Attributable to FIS Common Stockholders

Earnings from continuing operations, net of tax, attributable to FIS common stockholders totaled $185 million and $177 million resulting in earnings per diluted share of $0.56 and $0.62 for the three-month periods and $360 million and $533 million resulting in earnings per diluted share of $1.09 and $1.87 for the nine-month periods ended September 30, 2016 and

25


2015, respectively. These results reflect the variances described above as well as the increase in shares outstanding from the SunGard acquisition.

Segment Results of Operations (Unaudited)

Adjusted EBITDA is defined as EBITDA (defined as net income (loss) before net interest expense, income tax provision (benefit) and depreciation and amortization, including amortization of purchased intangibles), plus certain non-operating items. This measure is reported to the chief operating decision maker for purposes of making decisions about allocating resources to the segments and assessing their performance. For this reason, Adjusted EBITDA, as it relates to our segments, is presented in conformity with Accounting Standards Codification 280, Segment Reporting. The non-operating items affecting the segment profit measure generally include acquisition accounting adjustments, acquisition, integration and severance costs, and restructuring expenses. For consolidated reporting purposes, these costs and adjustments are recorded in the Corporate and Other segment for the periods discussed below. Adjusted EBITDA for the respective segments excludes the foregoing costs and adjustments. Financial information, including details of our adjustments to EBITDA, for each of our segments is set forth in Note 10 to the condensed consolidated financial statements (unaudited) included in Part I of this Quarterly Report.

Integrated Financial Solutions
(in millions)

 
Three months ended
September 30,
 
Nine months ended
September 30,
 
2016
 
2015
 
2016
 
2015
Processing and services revenues
$
1,124

 
$
944

 
$
3,407

 
$
2,803