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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

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FORM 8-K

 

CURRENT REPORT

 

Pursuant to Section 13 or 15(d) of the

Securities Exchange Act of 1934

 

Date of Report (Date of Earliest Event Reported): October 23, 2003

 

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            CERTEGY INC.            

(Exact name of Registrant as Specified in its Charter)

 

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

 

11720 Amber Park Drive Suite 600 Alpharetta, Georgia		30004
(Address of principal executive offices)		(Zip code)

 

Registrant’s telephone number, including area code: (678) 867-8000

 

Not Applicable

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

 

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Item 7.

Financial Statements, Pro Forma Information and Exhibits

 

(a)

Financial Statements of Businesses Acquired:

 

None.

 

(b)

Pro Forma Financial Information:

 

None.

 

(c)

Exhibits:

 

Exhibit No.		Description
99.1		Certegy Inc. press release dated October 23, 2003, announcing Certegy’s financial results for the third quarter of 2003 (furnished pursuant to Item 12 of Form 8-K).

 

Item 12.

Results of Operations and Financial Condition

 

On October 23, 2003, Certegy Inc. (“Certegy”) issued a press release to announce its financial results for the third quarter of 2003. A copy of the press release is attached as Exhibit 99.1.

 

The press release presents certain operating income and corporate expense measures that exclude charges in 2002 for asset impairment in our Brazilian card operation, litigation settlement, severance and market value loss on life insurance policies collaterally assigned to Certegy. The press release also presents an earnings per share projection that excludes charges in 2003 related to contract early termination costs and other net charges primarily related to downsizing our Brazilian card operation. The press release reconciles these measures to the most directly comparable operating income and earnings per share measures calculated and presented in accordance with GAAP.

 

Management believes that presentation of these measures excluding the described charges is useful because it allows investors and management to evaluate and compare Certegy’s core operating results from ongoing operations from period to period in a more meaningful and consistent manner than relying exclusively on GAAP financial measures. Non-GAAP financial measures however should not be considered in isolation or as an alternative to financial measures calculated and presented in accordance with GAAP.

 

As used herein, “GAAP” refers to accounting principles generally accepted in the United States.

 

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The information in this Report, including the Exhibit attached hereto, is furnished solely pursuant to Item 12 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.

 

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
								Name:    Michael T. Vollkommer
								Title:      Corporate Vice President and                Chief Financial Officer

 

Dated:    October 23, 2003

 

		Press Release		Certegy Inc.
				11720 Amber Park Drive
				Suite 600
				Alpharetta, Georgia 30004
		Date: October 23, 2003		Phone: 678-867-8000
				Fax:      678-867-8100
				Contact: Mary Waggoner
				Certegy Inc.
				VP—Investor and Public Relations
				678-867-8004

 

FOR IMMEDIATE RELEASE

 

CERTEGY REPORTS THIRD QUARTER RESULTS

EPS OF $0.40 ON REVENUE OF $255.8 MILLION

 

ALPHARETTA, GA, October 23, 2003 — Certegy Inc. (NYSE:CEY) today reported third quarter 2003 diluted earnings per share of $0.40 on revenue of $255.8 million, operating income of $43.5 million and net income of $26.3 million.

 

“We met our objectives for the quarter and are pleased with our overall results,” stated Lee Kennedy, Certegy’s chairman, president and CEO. “Consistent with prior quarters, our North American card business continues to produce strong revenue growth and operating margins. We are also encouraged by the recent modest improvement in retail sales, which drove higher check guarantee volume growth and improved profitability in our core check business.”

 

THIRD QUARTER FINANCIAL HIGHLIGHTS

 

Highlights of the 2003 third quarter results as compared to the prior year quarter are as follows:

 

•

Revenue increased 0.5% to $255.8 million.

•

Operating income of $43.5 million increased 16.7%.

•

Interest expense totaled $2.0 million versus $1.6 million in the prior year quarter.

•

Net income increased by 19.8% to $26.3 million.

•

Diluted earnings per share of $0.40 increased by 25.0%.

•

The Company repurchased approximately 1.4 million shares of common stock at an average price of $28.50 per share.

 

Operating income in the third quarter of 2002 of $37.3 million included other charges of $9.4 million ($5.9 million after-tax) as described in note 2 to the accompanying quarterly income statement information. Excluding these charges from the 2002 third quarter results, operating income declined 6.7% and diluted earnings per share remained flat in the 2003 quarter.

 

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Also during the quarter,

 

•

Certegy’s Board of Directors increased total share repurchase authority to $100 million, of which approximately $61.2 million remains, and approved a dividend of $0.05 per share paid on October 15 to holders of record as of October 1.

•

The Company issued $200 million of five-year senior unsecured notes at 4.75%, the proceeds of which were primarily used to repay outstanding indebtedness on the Company’s revolving credit facility.

 

SEGMENT RESULTS

 

Card Services generated revenue of $164.0 million in the third quarter of 2003, or 2.1% below the 2002 quarter. Strong 15.6% revenue growth in the Company’s North American card issuing operation was offset by declines in South American card issuing revenue and domestic merchant processing revenue. Card Services’ operating income of $36.6 million increased $2.0 million, or 5.7%, compared to $34.7 million in the third quarter of 2002. The prior year quarter included a $4.2 million asset impairment charge related to the Company’s Brazilian card operation. Excluding this charge, operating income declined 5.8%.

 

Check Services generated revenue of $91.7 million in the third quarter of 2003, an increase of 5.6% over the 2002 quarter driven by improved check guarantee volumes. Check Services’ operating income of $11.9 million increased by $3.7 million, or 46.1%, compared to $8.1 million in the corresponding 2002 quarter. The prior year quarter included $4.0 million in litigation settlement costs. Excluding this charge, operating income declined 1.9%.

 

Corporate expense of $5.0 million decreased by $0.5 million compared to $5.5 million in the third quarter of 2002. The prior year quarter included approximately $1.2 million in severance and other charges. Excluding the prior year charges, corporate expense increased $0.7 million compared to the prior year quarter. Rising insurance and employee benefit expenses and the timing of certain administrative costs drove corporate expense higher than the earlier 2003 quarters.

 

BUSINESS DEVELOPMENTS

 

Certegy’s global card base increased to 45.2 million at quarter-end. Domestic card issuing transaction volumes increased by 9.6% over the prior-year quarter, driven primarily by 18.3% growth in debit card transactions.

 

During the quarter, Certegy announced that Chartway Federal Credit Union had expanded its current credit card processing relationship to include debit card processing and e-banking services. The Company also finalized an agreement to process Visa and MasterCard transactions and personal loans for Krung Thai Card Public Company of Thailand (“KTC”). Certegy will process KTC’s 750,000 credit card and loan accounts from its state-of-the art processing center located in Melbourne, Australia.

 

Certegy also announced plans to participate in the Visa POS Check Service as an acquiring processor and a third-party check authorization source.

 

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DEFERRAL OF ACCOUNTING CHANGE

 

In January 2003, the Financial Accounting Standards Board (“FASB”) issued Interpretation No. 46, “Consolidation of Variable Interest Entities, an Interpretation of Accounting Research Bulletin No. 51” (“FIN 46”). On October 8, 2003, the FASB agreed to defer the effective date of FIN 46 to December 31, 2003. The previous rule required adoption as of July 1, 2003. The adoption of the new accounting standard is expected to result in a cumulative effect of accounting change expense of approximately $0.02 per diluted share in the fourth quarter of 2003, and an ongoing reduction in earnings per diluted share of approximately $0.01 per annum. This change is related to the accounting for the synthetic lease on the Company’s facility located in St. Petersburg, Florida.

 

OUTLOOK

 

The Company expects full year 2003 diluted earnings per share of $1.52 to $1.55, excluding year-to-date charges described in note 2 to the accompanying nine-month income statement information of $0.12 per diluted share and the expected cumulative effect of the FIN 46 change of $0.02 per diluted share in the fourth quarter.

 

TELECONFERENCE

 

Management will host a teleconference to discuss third quarter earnings on Thursday, October 23, 2003, at 9:00 a.m. Eastern Time. The live audio Webcast will be available at www.certegy.com. Please be advised that Microsoft’s Windows Media Player^™ 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.

 

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Certegy (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, 117,000 retailers and 100 million consumers worldwide. Headquartered in Alpharetta, Georgia, Certegy maintains a strong global presence with operations in the United States, United Kingdom, Ireland, France, Chile, Brazil, Australia and New Zealand. 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 2002. For more information on Certegy, please visit www.certegy.com.

 

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The statements in this release include forward-looking statements that are based on current expectations, assumptions, estimates, and projections about Certegy and our industry. They 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

 

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those statements. The factors that could, either individually or in the aggregate, affect our performance include the following, which are described in greater detail in the section entitled “Risk Factors” in our Registration Statement on Form S-4 filed on September 26, 2003 with the SEC: Our reliance on a small number of financial industries for the majority of our revenues; our reliance on key strategic relationships; the necessity to maintain qualifications set by bank card associations in order to continue to provide transaction processing services; potential liability when merchant customers cannot or do not reimburse us for chargebacks resolved in favor of cardholders, or when checks we warrant are dishonored by the check writer’s bank; potential loss of customers from continued consolidation in the financial services and in retail industries; changes in regulation or industry standards applicable to our businesses or those of our customers; the level of economic growth or other factors affecting demand for our products and services; ability to maintain or improve our competitive positions against current and potential competitors; database security and reliability of our information technology systems; risks associated with investments and operations in foreign countries, including exchange rate fluctuations and local political, social, and economic factors, and those other risks listed in the above-referenced section of our Form S-4.

 

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CERTEGY INC.

CONSOLIDATED STATEMENTS OF INCOME

FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002

(In thousands, except per share amounts)

(Unaudited)

 

		Three Months Ended September 30,
		2003				2002
Revenues.		$	255,791			$	254,506
Operating expenses(1):
Costs of services			182,256				178,972
Selling, general and administrative			30,012				28,878
Other(2)			—				9,365
			212,268				217,215
Operating income			43,523				37,291
Other income, net			474				151
Interest expense			(2,045	)			(1,619	)
Income before income taxes			41,952				35,823
Provision for income taxes			(15,627	)			(13,840	)
Net income		$	26,325			$	21,983
Basic earnings per share		$	0.40			$	0.32
Average shares outstanding			65,019				68,850
Diluted earnings per share		$	0.40			$	0.32
Average shares outstanding			65,820				69,451

 

Revenues and operating income of the Company’s reportable segments for the three months ended September 30, 2003 and 2002 are as follows:

 

		Three Months Ended September 30,
		2003				2002
Revenues:
Card Services		$	164,048			$	167,609
Check Services			91,743				86,897
		$	255,791			$	254,506
Operating income(2):
Card Services		$	36,630			$	34,666
Check Services			11,852				8,110
			48,482				42,776
General corporate expense			(4,959	)			(5,485	)
		$	43,523			$	37,291

 

(1)

Certain 2002 expenses have been reclassified between costs of services and selling, general and administrative to conform to the current year presentation.

 

(2)

Other charges of $9.4 million in 2002 ($5.9 million after-tax) represent a $4.2 million asset impairment charge related to the Company’s Brazilian card operation, a $4.0 million litigation settlement in Check Services, $0.2 million of severance charges in general corporate expense, and a $1.0 million market value loss on the Company’s collateral assignment in life insurance policies held for the benefit of certain employees recognized in general corporate expense.

 

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CERTEGY INC.

CONSOLIDATED STATEMENTS OF INCOME

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002

(In thousands, except per share amounts)

(Unaudited)

 

		Nine Months Ended September 30,
		2003				2002
Revenues		$	743,352			$	744,717
Operating expenses(1):
Costs of services			539,290				547,211
Selling, general and administrative			89,978				84,751
Other(2)			12,203				9,365
			641,471				641,327
Operating income			101,881				103,390
Other income, net			1,457				922
Interest expense			(5,354	)			(5,345	)
Income before income taxes			97,984				98,967
Provision for income taxes			(36,499	)			(37,993	)
Net income		$	61,485			$	60,974
Basic earnings per share		$	0.94			$	0.88
Average shares outstanding			65,462				68,913
Diluted earnings per share		$	0.93			$	0.87
Average shares outstanding			66,117				69,830

 

Revenues and operating income of the Company’s reportable segments for the nine months ended September 30, 2003 and 2002 are as follows:

 

		Nine Months Ended September 30,
		2003				2002
Revenues:
Card Services		$	481,540			$	497,340
Check Services			261,812				247,377
		$	743,352			$	744,717
Operating income(2):
Card Services		$	88,455			$	90,456
Check Services			26,825				26,672
			115,280				117,128
General corporate expense			(13,399	)			(13,738	)
		$	101,881			$	103,390

 

(1)

Certain 2002 expenses have been reclassified between costs of services and selling, general and administrative to conform to the current year presentation.

 

(2)

Other charges of $12.2 million in 2003 ($7.7 million after-tax) represent $9.6 million of early termination costs associated with a data processing contract and $2.6 million of other net charges primarily related to the downsizing of the Company’s Brazilian card operation. Other charges of $9.4 million in 2002 ($5.9 million after-tax) represent a $4.2 million asset impairment charge related to the Company’s Brazilian card operation, a $4.0 million litigation settlement in Check Services, $0.2 million of severance charges in general corporate expense, and a $1.0 million market value loss on the Company’s collateral assignment in life insurance policies held for the benefit of certain employees recognized in general corporate expense.

 

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CERTEGY INC.

CONSOLIDATED BALANCE SHEETS

AS OF SEPTEMBER 30, 2003 AND DECEMBER 31, 2002

(In thousands)

 

		September 30, 2003				December 31, 2002
		(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents		$	44,666			$	14,166
Settlement deposits			22,815				27,104
Trade accounts receivable, net of allowance for doubtful accounts of $2,003 and $2,628, respectively			88,759				104,597
Settlement receivables			99,614				78,636
Claims recoverable			35,917				50,309
Other current assets			37,293				37,188
Total current assets			329,064				312,000
Property and equipment, net			39,119				38,637
Goodwill, net			184,192				168,956
Other intangible assets, net			32,696				31,342
Systems development and other deferred costs, net			113,987				96,706
Other assets, net			56,772				54,500
Total assets		$	755,830			$	702,141
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Trade accounts payable		$	21,308			$	22,916
Settlement payables			122,429				105,740
Claims payable			28,386				48,306
Accrued salaries and bonuses			11,280				10,639
Income taxes payable			19,104				8,545
Other current liabilities			75,272				54,784
Total current liabilities			277,779				250,930
Long-term debt			199,504				214,200
Deferred income taxes			32,277				32,801
Other long-term liabilities			7,727				5,767
Total liabilities			517,287				503,698
Shareholders’ equity:
Common stock			695				695
Paid-in capital			248,302				249,115
Retained earnings			198,795				140,552
Deferred compensation			(11,523	)			(9,116	)
Accumulated other comprehensive loss			(86,636	)			(114,799	)
Treasury stock			(111,090	)			(68,004	)
Total shareholders’ equity			238,543				198,443
Total liabilities and shareholders’ equity		$	755,830			$	702,141

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CERTEGY INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002

(In thousands)

(Unaudited)

 

		Nine Months Ended September 30,
		2003				2002
Cash flows from operating activities:
Net income		$	61,485			$	60,974
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization			31,118				29,365
Amortization of deferred compensation and financing costs			4,057				4,021
Other noncash items			1,893				5,233
Deferred income taxes			(4	)			9,905
Changes in assets and liabilities:
Accounts receivable, net			16,753				12,290
Current liabilities, excluding settlement and claims payables			10,931				(9,757	)
Claims accounts, net			(3,429	)			(6,218	)
Other current assets			(460	)			(3,243	)
Other long-term liabilities			1,956				(374	)
Other assets			(5,222	)			(5,498	)
Net cash provided by operating activities			119,078				96,698
Cash flows from investing activities:
Capital expenditures			(34,292	)			(39,697	)
Acquisition			(4,521	)			—
Net cash used in investing activities			(38,813	)			(39,697	)
Cash flows from financing activities:
Net repayments on revolving credit facility			(214,200	)			(63,300	)
Proceeds from bond issuance, net of discount and payment of debt issue costs			196,680				—
Proceeds from exercise of stock options			2,879				15,771
Treasury stock purchases			(39,838	)			(17,258	)
Other			(5	)			(358	)
Net cash used in financing activities			(54,484	)			(65,145	)
Effect of foreign currency exchange rates on cash			4,719				(1,687	)
Net cash provided (used)			30,500				(9,831	)
Cash and cash equivalents, beginning of period			14,166				27,674
Cash and cash equivalents, end of period		$	44,666			$	17,843

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CERTEGY INC.

SUPPLEMENTAL INFORMATION

(Unaudited)

 

 

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CERTEGY INC.

SUPPLEMENTAL INFORMATION, CONTINUED

(Unaudited)