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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

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FORM 8-K

 

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CURRENT REPORT

 

Pursuant to Section 13 or 15(d) of the

Securities Exchange Act of 1934

 

Date of Report (Date of Earliest Event Reported): July 21, 2005

 

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CERTEGY INC

(Exact name of Registrant as Specified in its Charter)

 

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Georgia		001-16427		58-2606325
(State or other Jurisdiction of Incorporation or Organization)		(Commission File Number)		(IRS Employer Identification No.)

 

100 Second Avenue South Suite 1100S St. Petersburg, FL		33701
(Address of principal executive offices)		(Zip code)

 

Registrant’s telephone number, including area code: (727) 227-8000

 

(Former name or former address, if changed since last report)

 

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Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2.):

 

¨	Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

 

¨	Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

 

¨	Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

 

¨	Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

 

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ITEM 2.02 RESULTS OF OPERATIONS AND FINANCIAL CONDITION

 

On July 21, 2005, Certegy Inc. (“Certegy”) issued a press release to announce its financial results for the second quarter of 2005. A copy of the press release is attached as Exhibit 99.1.

 

The information in the Report, including the Exhibit attached hereto, is furnished solely pursuant to Item 2.02 of this Form 8-K. Consequently, it is not deemed “filed” for the purposes of Section 18 of the Securities Exchange Act of 1934, or otherwise subject to the liabilities of that section. It may only be incorporated by reference in another filing under the Exchange Act or Securities Act of 1933 if such subsequent filing specifically references this Form 8-K.

 

ITEM 9.01 FINANCIAL STATEMENTS AND EXHIBITS

 

Exhibit No.		Description
99.1		Certegy Inc. press release dated July 21, 2005, announcing the Company’s financial results for the second quarter of 2005 (furnished pursuant to Item 2.02 of Form 8-K).

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

 

				CERTEGY INC.
		By:		/s/ Michael T. Vollkommer
Date: July 21, 2005				Michael T. Vollkommer Executive Vice President and Chief Financial Officer

Exhibit 99.1

 

 

 

FOR IMMEDIATE RELEASE

 

CERTEGY REPORTS SECOND QUARTER EARNINGS

DILUTED EPS FROM CONTINUING OPERATIONS

INCREASES 21.2% TO $0.40

 

St. Petersburg, FL, July 21, 2005 – Certegy Inc. (NYSE:CEY) today reported second quarter 2005 diluted earnings per share of $0.75, including an after-tax gain of $27.3 million on the sale of its merchant acquiring business and a $6.8 million after-tax write-down of its remaining merchant acquiring portfolio held for sale to estimated net realizable value, as summarized below:

 

		Net Income				Diluted EPS
Continuing Operations		$	25,391			$	0.40
Discontinued Operations:
Gain on sale			27,276			$	0.43
Write-down			(6,823	)			(0.11	)
Income from operations			1,700				0.03
			22,153				0.35
Net Income		$	47,544			$	0.75

 

Diluted earnings per share from continuing operations was $0.40, a 21.2% increase compared to $0.33 in the second quarter of 2004. Revenue of $276.0 million increased 8.0%, and operating income of $43.4 million increased 15.8% over the prior year quarter.

 

SECOND QUARTER FINANCIAL HIGHLIGHTS

 

Summarized highlights of the 2005 second quarter results from continuing operations, as compared to the second quarter of 2004, are as follows:

 

•

Revenue increased 8.0% to $276.0 million.

 

•

Card Services increased 13.2%.

 

•

Check Services increased 1.1%.

 

•

Operating income of $43.4 million increased 15.8%.

 

•

Card Services increased 8.2%.

 

•

Check Services increased 39.7%.

 

•

Corporate expense increased 20.2%.

 

•

Net income from continuing operations increased 19.3% to $25.4 million.

 

•

Diluted earnings per share from continuing operations increased 21.2% to $0.40.

 

•

Capital expenditures totaled $16.1 million.

 

“Strong revenue and earnings momentum in Card Services, e-Payments and Cash Access, along with another quarter of significant margin expansion in Check Services, drove solid second quarter results,” stated Lee A. Kennedy, chairman and chief executive officer of Certegy. “While Check Services revenue growth was weaker than expected, we remain confident that strong new customer signings and new product initiatives will generate increased revenue growth in the second half of the year.”

 

SEGMENT RESULTS

 

Card Services generated revenue of $164.1 million in the second quarter of 2005, an increase of 13.2% above the 2004 quarter. Revenue growth of 10.0% in the Company’s North American card operation was driven by growth in institution merchant processing, e-payments (e-banking and electronic bill payment), card transactions, new customer signings and increased adoption of card loyalty programs. International card revenue increased 30.6%, primarily due to new customer signings, growth within existing customers, higher software maintenance and support, the prior year CariCard acquisition and favorable currency rates versus the 2004 quarter. Card Services operating income of $35.3 million increased 8.2%, compared to $32.6 million in the second quarter of 2004. Card Services operating margin of 21.5% in the second quarter of 2005 decreased by 100 basis points compared to an operating margin of 22.5% in the prior year quarter, primarily due to product mix and business development costs.

 

Check Services generated revenue of $111.9 million in the second quarter of 2005, an increase of 1.1% over the 2004 quarter. New customer additions, strong growth in cash access services and favorable currency rates were partially offset by lower check guarantee volumes. Check Services operating income of $16.2 million increased 39.7% compared to $11.6 million in the second quarter of 2004. Check Services operating margin of 14.5% in the second quarter of 2005 increased by 400 basis points compared to an operating margin of 10.5% in the prior year quarter. Certegy’s proprietary risk modeling technology, improved collections and increased margins in cash access services drove the significantly improved profitability in the check segment.

 

Corporate expense of $8.1 million increased by $1.4 million over the prior year quarter. The increase is largely attributable to higher audit related fees and business development costs. Interest expense of $3.3 million was comparable to the prior year quarter. Other income of $576,000 increased by $491,000, driven by higher cash balances and interest rates.

 

SALE OF MERCHANT ACQUIRING BUSINESS

 

In June 2005, Certegy completed the sale of a majority of its merchant acquiring business. The Company realized an after-tax gain of $27.3 million ($0.43 per diluted share) on the sale. Also during the quarter, the Company recorded a $6.8 million after-tax write-down ($0.11 per diluted share) of its remaining merchant acquiring portfolio to estimated net realizable value. The Company expects to complete the sale of the remaining portfolio in the third quarter of 2005.

 

OUTLOOK

 

Management provided its earnings outlook for the full year 2005 as follows. This guidance is based on the Company’s continuing operations only, and excludes results from the discontinued merchant acquiring business:

 

•

Revenue growth of approximately 10%, driven by low double-digit revenue growth in Card Services and mid single-digit growth in Check Services.

 

•

Operating income growth of 15% to 17% over $168.5 million in 2004.

 

•

The effective tax rate is expected to approximate 37.6%.

 

•

Diluted earnings per share from continuing operations of $1.83 to $1.86, representing growth of 19.6% to 21.6% over $1.53 in 2004.

 

The Company expects to achieve revenue growth of approximately 9% in the third quarter of 2005, driven by low double-digit growth in Card Services and mid single-digit growth in Check Services. Diluted earnings per share from continuing operations in the third quarter of 2005 is expected to be $0.46 to $0.47.

 

TELECONFERENCE

 

Management will host a teleconference to discuss second quarter earnings on Thursday, July 21, 2005, at 10:00 a.m. Eastern Time. The live audio Webcast will be available at www.certegy.com. Please be advised that Microsoft’s Windows Media PlayerTM must be downloaded prior to accessing the presentation. It can be downloaded from www.microsoft.com/windows/mediaplayer. A replay of the Webcast will be available in the Investor Center section of the website after the call ends continuing through May 5, 2005.

 

About Certegy

 

Certegy Inc. (NYSE:CEY) provides credit and debit processing, check risk management and check cashing services, merchant processing and e-banking services to over 6,000 financial institutions, 100,000 retailers and 100 million consumers worldwide. Headquartered in St. Petersburg, Florida, Certegy maintains a strong global presence with operations in the United States,

 

United Kingdom, Ireland, France, Chile, Brazil, Australia, New Zealand, Thailand and the Caribbean. As a leading payment services provider, Certegy offers a comprehensive range of transaction processing services, check risk management solutions and integrated customer support programs that facilitate the exchange of business and consumer payments. Certegy generated over $1.0 billion in revenue in 2004. For more information on Certegy, please visit www.certegy.com.

 

Forward-Looking Statements

 

The statements in this release include forward-looking statements that are based on current expectations, assumptions, estimates, and projections about Certegy and our industry. Without limitation, Certegy’s revenue, operating income and earnings per share projections for fiscal 2005 under the heading “Outlook” above are forward-looking statements. Forward-looking statements are not guarantees of future performance and are subject to risks and uncertainties, many of which are outside of Certegy’s control that may cause actual results to differ significantly from what is expressed in those statements. Factors that could, either individually or in the aggregate, affect our performance include: our reliance on a small number of business segments and strategic relationships; our ability to comply with bankcard association rules and government regulations; the sensitivity of our business to the economy; declines in check writing; and other factors described in detail in the section entitled “Certain Factors Affecting Forward-Looking Statements” in our 2004 Annual Report on Form 10-K filed on March 11, 2005, with the SEC.

 

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CERTEGY INC.

CONSOLIDATED STATEMENTS OF INCOME

FOR THE THREE MONTHS ENDED JUNE 30, 2005 AND 2004

(In thousands, except per share amounts)

(Unaudited)

 

		Three Months Ended June 30,
		2005				2004
Revenues		$	276,023			$	255,664
Operating expenses(1):
Costs of services			196,466				184,537
Selling, general and administrative			36,180				33,684
			232,646				218,221
Operating income			43,377				37,443
Other income, net			576				85
Interest expense			(3,250	)			(3,153	)
Income from continuing operations before income taxes			40,703				34,375
Provision for income taxes			(15,312	)			(13,092	)
Income from continuing operations			25,391				21,283
Income from discontinued operations, net of taxes of $14.8 million and $0.9 million, respectively(2)			22,153				1,536
Net income		$	47,544			$	22,819
Basic earnings per share:
Income from continuing operations		$	0.41			$	0.34
Income from discontinued operations			0.36				0.02
Net income		$	0.77			$	0.36
Average shares outstanding			61,899				63,083
Diluted earnings per share:
Income from continuing operations		$	0.40			$	0.33
Income from discontinued operations			0.35				0.02
Net income		$	0.75			$	0.36
Average shares outstanding			63,029				64,272

 

Revenues and operating income of the Company’s reportable segments for the three months ended June 30, 2005 and 2004 are as follows:

 

		Three Months Ended June 30,
		2005				2004
Revenues:
Card Services		$	164,100			$	144,928
Check Services			111,923				110,736
		$	276,023			$	255,664
Operating income(1):
Card Services		$	35,253			$	32,568
Check Services			16,246				11,633
			51,499				44,201
General corporate expense			(8,122	)			(6,758	)
		$	43,377			$	37,443

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(1)	The Company adopted Statement of Financial Accounting Standards No. 123 (revised 2004), “Share-Based Payment,” on January 1, 2005, restating all prior periods. SFAS No. 123(R) requires the Company to expense stock options issued to employees. See Item 11 for further information.

(2)

During the third quarter of 2004, Certegy’s Board of Directors approved a plan to dispose of the Company’s retail merchant acquiring business. On June 1, 2005, the Company sold a majority of its retail merchant acquiring business. The remainder of the business is expected to be sold during the third quarter of 2005. See Item 12 for further information.

CERTEGY INC.

CONSOLIDATED STATEMENTS OF INCOME

FOR THE SIX MONTHS ENDED JUNE 30, 2005 AND 2004

(In thousands, except per share amounts)

(Unaudited)

 

		Six Months Ended June 30,
		2005				2004
Revenues		$	538,481			$	495,004
Operating expenses(1):
Costs of services			386,758				361,777
Selling, general and administrative			71,294				65,814
			458,052				427,591
Operating income			80,429				67,413
Other income, net			741				305
Interest expense			(6,555	)			(6,129	)
Income from continuing operations before income taxes			74,615				61,589
Provision for income taxes			(28,069	)			(23,455	)
Income from continuing operations			46,546				38,134
Income from discontinued operations, net of taxes of $16.1 million and $1.6 million, respectively(2)			24,194				2,808
Net income		$	70,740			$	40,942
Basic earnings per share:
Income from continuing operations		$	0.75			$	0.60
Income from discontinued operations			0.39				0.04
Net income		$	1.14			$	0.65
Average shares outstanding			61,847				63,380
Diluted earnings per share:
Income from continuing operations		$	0.74			$	0.59
Income from discontinued operations			0.38				0.04
Net income		$	1.12			$	0.63
Average shares outstanding			62,937				64,478

 

Revenues and operating income of the Company’s reportable segments for the six months ended June 30, 2005 and 2004 are as follows:

 

		Six Months Ended June 30,
		2005				2004
Revenues:
Card Services		$	318,056			$	283,582
Check Services			220,425				211,422
		$	538,481			$	495,004
Operating income(1):
Card Services		$	66,299			$	61,581
Check Services			30,448				19,683
			96,747				81,264
General corporate expense			(16,318	)			(13,851	)
		$	80,429			$	67,413

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(1)	The Company adopted Statement of Financial Accounting Standards No. 123 (revised 2004), “Share- Based Payment,” on January 1, 2005, restating all prior periods. SFAS No. 123(R) requires the Company to expense stock options issued to employees. See Item 11 for further information.

(2)

During the third quarter of 2004, Certegy’s Board of Directors approved a plan to dispose of the Company’s retail merchant acquiring business. On June 1, 2005, the Company sold a majority of its retail merchant acquiring business. The remainder of the business is expected to be sold during the third quarter of 2005. See Item 12 for further information.

CERTEGY INC.

SUPPLEMENTAL INFORMATION

(Unaudited)

 

1.	Revenues by product and service offering are as follows (in thousands):

 

		2004															2005
		1st Qtr			2nd Qtr			3rd Qtr			4th Qtr			Year			1st Qtr			2nd Qtr
Card Issuer Services		$	117,862		$	123,410		$	126,762		$	134,562		$	502,596		$	128,727		$	135,559
Check Services			100,686			110,736			113,118			124,584			449,124			108,502			111,923
Merchant Processing			19,294			20,225			21,232			21,023			81,774			22,756			26,008
Software and Support			1,498			1,293			1,548			1,673			6,012			2,473			2,533
		$	239,340		$	255,664		$	262,660		$	281,842		$	1,039,506		$	262,458		$	276,023

 

2.	Revenues by geographic area (based on location of customer) are as follows (in thousands):

 

		2004															2005
		1st Qtr			2nd Qtr			3rd Qtr			4th Qtr			Year			1st Qtr			2nd Qtr
Domestic		$	197,478		$	215,295		$	217,183		$	231,947		$	861,903		$	215,372		$	227,631
International			41,862			40,369			45,477			49,895			177,603			47,086			48,392
		$	239,340		$	255,664		$	262,660		$	281,842		$	1,039,506		$	262,458		$	276,023

 

3.	Revenues are comprised of the following (in thousands):

 

		2004															2005
		1st Qtr			2nd Qtr			3rd Qtr			4th Qtr			Year			1st Qtr			2nd Qtr
Product and Service Fees		$	204,509		$	217,713		$	225,440		$	245,947		$	893,609		$	221,290		$	230,042
Interchange Fees			16,054			16,917			17,978			18,054			69,003			19,678			22,787
Reimbursable Expenses			18,777			21,034			19,242			17,841			76,894			21,490			23,194
		$	239,340		$	255,664		$	262,660		$	281,842		$	1,039,506		$	262,458		$	276,023

 

4.	Currency translation increased (decreased) revenues and operating income for the three months and six months ended June 30, 2005 as compared with the prior year as follows (in thousands):

 

		Revenues
		1st Qtr			2nd Qtr			YTD
Card Services		$	925		$	2,215		$	3,140
Check Services			557			504			1,061
		$	1,482		$	2,719		$	4,201

 

		Operating Income
		1st Qtr				2nd Qtr				YTD
Card Services		$	(217	)		$	(395	)		$	(612	)
Check Services			64				116				180
		$	(153	)		$	(279	)		$	(432	)

 

 

CERTEGY INC.

SUPPLEMENTAL INFORMATION, CONTINUED

(Unaudited)

 

5.	Check volumes in dollars are as follows (in millions):

 

		2004															2005
		1st Qtr			2nd Qtr			3rd Qtr			4th Qtr			Year			1st Qtr			2nd Qtr
Domestic		$	8,206		$	8,623		$	8,719		$	10,961		$	36,509		$	10,702		$	11,927
International			925			904			917			1,065			3,811			840			870
		$	9,131		$	9,527		$	9,636		$	12,026		$	40,320		$	11,542		$	12,797
Guarantee		$	7,048		$	7,248		$	7,207		$	8,548		$	30,051		$	6,960		$	7,159
Verification			2,083			2,279			2,429			3,478			10,269			4,582			5,638
		$	9,131		$	9,527		$	9,636		$	12,026		$	40,320		$	11,542		$	12,797

 

6.	Number of cards and accounts processed (end of period) are as follows (in thousands):

 

		2004								2005
		1st Qtr		2nd Qtr		3rd Qtr		4th Qtr		1st Qtr		2nd Qtr
Cards:
Domestic		23,466		23,843		23,846		23,846		24,239		24,692
International		23,359		24,244		23,763		25,026		26,076		26,422
		46,825		48,087		47,609		48,872		50,315		51,114
Accounts:
Domestic		18,069		18,254		17,033		17,032		17,314		17,637
International		20,282		21,044		20,620		21,972		22,739		22,992
		38,351		39,298		37,653		39,004		40,053		40,629

 

7.	Merchant volumes in dollars and number of transactions are as follows:

 

		2004															2005
		1st Qtr			2nd Qtr			3rd Qtr			4th Qtr			Year			1st Qtr			2nd Qtr
Dollars (in millions)		$	864		$	931		$	989		$	937		$	3,721		$	1,013		$	1,151
Number of Transactions (in thousands)			9,291			10,385			10,777			10,278			40,731			10,500			12,072

 

8.	Depreciation and amortization by segment is as follows (in thousands):

 

		2004															2005
		1st Qtr			2nd Qtr			3rd Qtr			4th Qtr			Year			1st Qtr			2nd Qtr
Card Services		$	7,985		$	8,067		$	8,722		$	9,280		$	34,054		$	9,025		$	9,360
Check Services			2,784			2,953			3,175			3,202			12,114			3,178			3,213
Corporate			315			322			320			324			1,281			326			311
		$	11,084		$	11,342		$	12,217		$	12,806		$	47,449		$	12,529		$	12,884

 

9.	Capital expenditures and acquisitions are as follows (in thousands):

 

		2004																	2005
		1st Qtr			2nd Qtr				3rd Qtr			4th Qtr				Year			1st Qtr			2nd Qtr
Capital expenditures		$	7,026		$	10,083			$	11,373		$	12,426			$	40,908		$	12,037		$	16,082
Acquisitions, net of cash acquired		$	33,391		$	(433	)		$	8,063		$	(300	)		$	40,721		$	—		$	—

 

 

CERTEGY INC.

SUPPLEMENTAL INFORMATION, CONTINUED

(Unaudited)

 

10.	Long-term debt at June 30, 2005 and December 31, 2004 consists of (in thousands):

 

		June 30, 2005			December 31, 2004
Unsecured notes, 4.75%, due 2008, net of unamortized discount		$	199,605		$	199,543
Borrowings under revolving credit facility			—			48,600
Notes payable, variable rate, due 2009			22,364			22,364
Capital lease obligations			4,057			3,461
		$	226,026		$	273,968

 

11.	Adoption of Statement of Financial Accounting Standards No. 123 (revised 2004), “Share-Based Payment”:

 

The Company adopted SFAS No. 123 (revised 2004) on January 1, 2005 using the modified retrospective method, restating all prior periods. SFAS No. 123(R) requires the Company to expense stock options issued to employees. Previously, the Company did not record compensation expense for employee stock options. Prior year periods are restated using the pro forma amounts previously disclosed in the Company’s consolidated financial statements under SFAS No. 123.

 

Stock option expense for 2005 and 2004 is as follows:

 

		2004																				2005
		1st Qtr				2nd Qtr				3rd Qtr				4th Qtr				Year				1st Qtr				2nd Qtr
Stock option expense		$	3,557			$	2,769			$	2,414			$	2,418			$	11,158			$	1,520			$	1,524
Income tax benefit			(1,022	)			(651	)			(580	)			(707	)			(2,960	)			(415	)			(430	)
		$	2,535			$	2,118			$	1,834			$	1,711			$	8,198			$	1,105			$	1,094
Diluted EPS		$	0.04			$	0.03			$	0.03			$	0.03			$	0.13			$	0.02			$	0.02

 

During 2005, the quarterly impact of SFAS No. 123(R) is expected to be approximately $0.02 per diluted share, amounting to approximately $0.08 per diluted share for the full year 2005.

 

Stock option expense for 2005 and 2004, by segment, is as follows:

 

		2004															2005
		1st Qtr			2nd Qtr			3rd Qtr			4th Qtr			Year			1st Qtr			2nd Qtr
Card Services		$	1,351		$	1,052		$	917		$	919		$	4,239		$	578		$	554
Check Services			717			558			487			487			2,249			306		$	331
Corporate			1,489			1,159			1,010			1,012			4,670			636			639
		$	3,557		$	2,769		$	2,414		$	2,418		$	11,158		$	1,520		$	1,524

 

12.	Sale of Retail Merchant Acquiring Business:

 

On June 1, 2005, the Company sold a majority of its retail merchant acquiring business. The remainder of the business will be sold during the third quarter of 2005. Income from discontinued operations in the second quarter of 2005 is comprised of:

 

		Before-Tax				Income Tax				After-Tax
Income from operations		$	2,721			$	(1,021	)		$	1,700
Gain on sale			45,433				(18,157	)			27,276
Write-down of remaining portfolio held for sale to estimated net realizable value			(11,167	)			4,344				(6,823	)
		$	36,987			$	(14,834	)		$	22,153