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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 24, 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 July 24, 2003, announcing the Company’s financial results for the second quarter of 2003 (furnished pursuant to Items 9 and 12 of Form 8-K).

 

ITEM 9. REGULATION FD DISCLOSURE

 

Pursuant to Exchange Act Release 47583, Certegy Inc. (“Certegy”) is furnishing the following information and Exhibit pursuant to Items 9 and 12 of Form 8-K.

 

On July 24, 2003, Certegy issued a press release to announce its financial results for the second quarter of 2003. A copy of the press release is attached as Exhibit 99.1.

 

The information in this Report, including the Exhibit attached hereto, is furnished solely pursuant to Items 9 and 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.

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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.

 

Date: July 24, 2003

EXHIBIT 99.1

 

 

 

FOR IMMEDIATE RELEASE

 

CERTEGY REPORTS SECOND QUARTER EARNINGS

 

DILUTED EPS OF $0.35, REVENUE OF $247.4 MILLION

 

Alpharetta, GA, July 24, 2003 – Certegy Inc. (NYSE:CEY) today reported second quarter 2003 diluted earnings per share of $0.35 on revenue of $247.4 million, operating income of $37.4 million and net income of $23.0 million.

 

“The second quarter results were in line with our expectations. Our domestic and international businesses, outside of South America, continue to generate strong growth,” stated Lee Kennedy, president, chairman and chief executive officer of Certegy. “The consolidated growth rates reflect the impact of previously reported customer deconversions, and will continue to do so through the first quarter of next year. Soft domestic consumer spending, which primarily impacts our check business, also affected our second quarter growth.”

 

SECOND QUARTER FINANCIAL HIGHLIGHTS

 

Highlights of the 2003 second quarter results as compared to 2002, are as follows:

 

•

Revenue declined 3.1% to $247.4 million.

•

Operating income of $37.4 million declined 2.4%.

•

Interest expense declined 6.9% to $1.6 million.

•

Net income increased by 0.1% to $23.0 million.

•

Diluted earnings per share of $0.35 increased by 6.1%.

•

Total debt outstanding was $185.0 million at June 30, 2003, and $175.0 million at July 24, 2003.

 

 

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SEGMENT RESULTS

 

Card Services generated revenue of $160.3 million in the second quarter of 2003, or 7.1% below the 2002 quarter. Strong revenue growth of 9.3% in North American card issuing and double-digit growth in the U.K. and Australian operations was offset by declines in South American card issuing revenue and domestic merchant processing revenue. Card Services’ operating income of $31.9 million increased 2.3% compared to the prior-year quarter. Strong card issuing revenue growth outside South America and efficiency gains drove a 180 basis point improvement in Card Services’ margin.

 

Check Services generated revenue of $87.1 million in the second quarter of 2003, an increase of 5.1% over the 2002 quarter. Weakness in domestic retail sales continues to impact revenue growth. Check Services’ operating income of $9.0 million declined by $2.2 million compared to the corresponding 2002 quarter due to $0.6 million in incremental check cashing start-up costs, the write-off of a $0.9 million receivable and a $0.7 million, or approximately 6.2%, decline in core business profitability caused by soft retail sales volume.

 

Corporate expense of $3.5 million decreased by $0.6 million compared to the 2002 second quarter. The decrease is due to the timing of certain administrative costs and the $0.4 million market value recovery of collateral assignments in life insurance policies.

 

 

BUSINESS HIGHLIGHTS

 

Certegy’s global card base totaled 45.1 million at quarter-end. Domestic card issuing transaction volumes increased by 9.8% over the prior-year quarter, driven primarily by 18.2% growth in debit card transactions. The company recently expanded its product offering to include Visa branded pre-paid debit cards and is scheduled to introduce teen and payroll cards in August. This new product launch is consistent with the Company’s strategy to provide the most comprehensive range of products and services to its customer base of more than 6,000 financial institutions.

 

Sales of Certegy’s PayNet check products continue to gain traction. Recent signings for electronic check/ACH services for online and telephone orders include Walmart.com and Shop at Home Network.

 

 

THIRD QUARTER 2003 ACCOUNTING CHANGE

 

In January 2003, the Financial Accounting Standards Board issued Interpretation No. 46, “Consolidation of Variable Interest Entities, an Interpretation of Accounting Research Bulletin No. 51” (“FIN 46”). While we continue to evaluate the potential impact, we currently estimate the adoption of FIN 46 will result in a cumulative effect of accounting change expense of approximately $0.02 per diluted share in the third quarter of 2003. FIN 46 is not expected to have a material impact on the Company’s ongoing financial results. Item 11 of the supplemental information attached to this press release provides further detail.

 

 

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OUTLOOK

 

Certegy reiterated its earnings per diluted share guidance of $1.52 to $1.55, excluding year-to-date charges of $0.12 per diluted share and the third quarter $0.02 per diluted share cumulative effect of accounting change. Certegy also provided third quarter 2003 diluted earnings per share guidance of $0.38 to $0.40, excluding the cumulative effect of accounting change.

 

 

TELECONFERENCE

 

Management will host a teleconference to discuss second quarter earnings on Thursday, July 24, 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^TM 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 one hour after the call ends through 10:00 p.m. Eastern time August 7, 2003.

 

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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 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 “Certain Factors Affecting Forward-Looking Statements” in our 2002 Annual Report on Form 10-K filed with the SEC: Our ability to maintain or improve our competitive positions against current and potential competitors; the level of economic growth or other factors affecting demand for our products and services; loss of key customer contracts or strategic relationships; changes in regulation or industry standards applicable to our businesses or those of our customers; 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 10-K.

 

###

 

Certegy (NYSE:CEY) provides credit and debit card processing, check risk management and check cashing services, and merchant processing 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, Canada, 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 $1.0 billion in revenue in 2002. For more information on Certegy, please visit www.certegy.com.

 

 

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CERTEGY INC.

CONSOLIDATED STATEMENTS OF INCOME

FOR THE THREE MONTHS ENDED JUNE 30, 2003 AND 2002

(In thousands, except per share amounts)

(Unaudited)

 

		Three Months Ended June 30,
			2003				2002
Revenues		$	247,392			$	255,369
Operating expenses(1):
Costs of services			180,977				189,131
Selling, general and administrative			29,450				27,920
Other(2)			(437	)			—
			209,990				217,051
Operating income			37,402				38,318
Other income, net			828				587
Interest expense			(1,628	)			(1,748	)
Income before income taxes			36,602				37,157
Provision for income taxes			(13,634	)			(14,213	)
Net income		$	22,968			$	22,944
Basic earnings per share		$	0.35			$	0.33
Average shares outstanding			65,536				69,052
Diluted earnings per share		$	0.35			$	0.33
Average shares outstanding			66,077				70,404

 

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

 

		Three Months Ended June 30,
Revenues:			2003				2002
Card Services		$	160,316			$	172,512
Check Services			87,076				82,857
		$	247,392			$	255,369
Operating income(2):
Card Services		$	31,867			$	31,146
Check Services			8,999				11,226
			40,866				42,372
General corporate expense			(3,464	)			(4,054	)
		$	37,402			$	38,318

 

(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 items of $0.4 million ($0.3 million after-tax, or $0.004 per diluted share) included in Corporate expense in the second quarter of 2003 represent a market value recovery of the Company's collateral assignment in life insurance policies held for the benefit of certain employees.

 

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CERTEGY INC.

CONSOLIDATED STATEMENTS OF INCOME

FOR THE SIX MONTHS ENDED JUNE 30, 2003 AND 2002

(In thousands, except per share amounts)

(Unaudited)

 

 

		Six Months Ended June 30,
			2003				2002
Revenues		$	487,561			$	490,211
Operating expenses(1):
Costs of services			357,034				368,239
Selling, general and administrative			59,966				55,873
Other(2)			12,203				—
			429,203				424,112
Operating income			58,358				66,099
Other income, net			983				771
Interest expense			(3,309	)			(3,726	)
Income before income taxes			56,032				63,144
Provision for income taxes			(20,872	)			(24,153	)
Net income		$	35,160			$	38,991
Basic earnings per share		$	0.54			$	0.57
Average shares outstanding			65,687				68,968
Diluted earnings per share		$	0.53			$	0.56
Average shares outstanding			66,170				70,200

 

Revenues and operating income of the Company's reportable segments for the six months ended June 30, 2003 and 2002 are as follows:

 

		Six Months Ended June 30,
Revenues:			2003				2002
Card Services		$	317,492			$	329,731
Check Services			170,069				160,480
		$	487,561			$	490,211
Operating income(2):
Card Services		$	51,825			$	55,790
Check Services			14,973				18,562
			66,798				74,352
General corporate expense			(8,440	)			(8,253	)
		$	58,358			$	66,099

 

(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 ($7.7 million after-tax, or $0.12 per diluted share) in the first six months of 2003 include $9.6 million of early termination costs associated with a data processing contract, $2.7 million of charges related to the downsizing of our Brazilian card operation, and $(0.1) million of other items. See Item 5 in the Supplemental information for details of these charges by segment.

 

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CERTEGY INC.

CONSOLIDATED BALANCE SHEETS

AS OF JUNE 30, 2003 AND DECEMBER 31, 2002

(In thousands)

 

		June 30, 2003				December 31, 2002
			(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents		$	39,819			$	14,166
Settlement deposits			28,284				27,104
Trade accounts receivable, net of allowance for doubtful accounts of $1,756 and $2,628, respectively			90,675				104,597
Settlement receivables			120,061				78,636
Claims recoverable			34,618				50,309
Other current assets			34,355				37,188
Total current assets			347,812				312,000
Property and equipment, net			37,929				38,637
Goodwill, net			186,080				168,956
Other intangible assets, net			29,221				31,342
Systems development and other deferred costs, net			110,655				96,706
Other assets, net			57,372				54,500
Total assets		$	769,069			$	702,141
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Trade accounts payable		$	23,632			$	22,916
Settlement payables			148,345				105,740
Claims payable			27,650				48,306
Accrued salaries and bonuses			9,918				10,639
Income taxes payable			14,347				8,545
Other current liabilities			65,808				54,784
Total current liabilities			289,700				250,930
Long-term debt			185,000				214,200
Deferred income taxes.			33,327				32,801
Other long-term liabilities			7,377				5,767
Total liabilities			515,404				503,698
Shareholders' equity:
Common stock			695				695
Paid-in capital			248,362				249,115
Retained earnings			175,712				140,552
Deferred compensation			(12,690	)			(9,116	)
Accumulated other comprehensive loss			(85,884	)			(114,799	)
Treasury stock			(72,530	)			(68,004	)
Total shareholders' equity			253,665				198,443
Total liabilities and shareholders' equity		$	769,069			$	702,141

 

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CERTEGY INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE SIX MONTHS ENDED JUNE 30, 2003 AND 2002

(In thousands)

(Unaudited)

 

		Six Months Ended June 30,
			2003				2002
Cash flows from operating activities:
Net income		$	35,160			$	38,991
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization			20,062				19,637
Noncash other charges			2,233				—
Other, net			1,893				2,076
Deferred income taxes			748				6,679
Changes in assets and liabilities:
Accounts receivable, net			17,447				16,539
Current liabilities, excluding settlement and claims payables			12,598				(7,759	)
Claims accounts, net			(2,865	)			(7,408	)
Other current assets			176				(1,640	)
Other long-term liabilities			1,607				444
Other assets			(4,113	)			1,690
Net cash provided by operating activities			84,946				69,249
Cash flows from investing activities:
Capital expenditures			(23,570	)			(26,850	)
Net cash used in investing activities			(23,570	)			(26,850	)
Cash flows from financing activities:
Net repayments of long-term debt			(29,200	)			(48,000	)
Proceeds from exercise of stock options			1,050				12,298
Treasury stock purchases			(11,796	)			(11,408	)
Other			—				(163	)
Net cash used in financing activities			(39,946	)			(47,273	)
Effect of foreign currency exchange rates on cash			4,223				(1,408	)
Net cash provided (used)			25,653				(6,282	)
Cash and cash equivalents, beginning of period			14,166				27,674
Cash and cash equivalents, end of period		$	39,819			$	21,392

 

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CERTEGY INC.

SUPPLEMENTAL INFORMATION

(Unaudited)

 

1.

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

 

		2002															2003
		1st Qtr			2nd Qtr			3rd Qtr			4th Qtr			Year			1st Qtr			2nd Qtr
Card Issuer Services		$	107,648		$	116,145		$	110,573		$	114,130		$	448,496		$	113,470		$	114,298
Check Services			77,623			82,857			86,897			99,688			347,065			82,993			87,076
Merchant Processing Services			48,566			54,248			54,104			45,988			202,906			40,385			43,679
Software and Support			1,005			2,119			2,932			3,445			9,501			3,321			2,339
		$	234,842		$	255,369		$	254,506		$	263,251		$	1,007,968		$	240,169		$	247,392

 

 

2.

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

 

		2002															2003
		1st Qtr			2nd Qtr			3rd Qtr			4th Qtr			Year			1st Qtr			2nd Qtr
Domestic		$	190,106		$	208,711		$	209,988		$	215,802		$	824,607		$	195,090		$	208,169
International			44,736			46,658			44,518			47,449			183,361			45,079			39,223
		$	234,842		$	255,369		$	254,506		$	263,251		$	1,007,968		$	240,169		$	247,392

 

3.

Revenues are comprised of the following (in thousands):

 

 

		2002															2003
			1st Qtr			2nd Qtr			3rd Qtr			4th Qtr			Year			1st Qtr			2nd Qtr
Product and Service Fees		$	180,310		$	192,809		$	194,984		$	212,002		$	780,105		$	191,527		$	193,657
Interchange Fees			39,475			43,932			43,834			35,391			162,632			31,699			34,508
Reimbursable Expenses			15,057			18,628			15,688			15,858			65,231			16,943			19,227
		$	234,842		$	255,369		$	254,506		$	263,251		$	1,007,968		$	240,169		$	247,392

 

In 2002, the Company adopted Emerging Issues Task Force Issue No. 01-14 ("EITF 01-14"), "Income Statement Characterization of Reimbursements Received for 'Out-of-Pocket' Expenses Incurred," which required that reimbursements received for out-of-pocket expenses be reclassified as revenues. In 2002, the Company disclosed the quarterly amounts reclassified to revenues as required by the adoption of EITF 01-14 and certain other reclassifications, including service fees from collection activities related to our check guarantee business. Prior to the adoption of EITF 01-14, service fees were netted against collection expense in the consolidated statement of income. These fees are included in product and service fees above.

 

4.

Currency translation increased (decreased) revenues and operating income in the second quarter and the first six months of 2003 as compared with the prior year as follows (in thousands):

 

		Revenues
		1st Qtr				2nd Qtr			YTD
Card Services		$	(3,243	)		$	489		$	(2,754	)
Check Services			1,533				1,442			2,975
		$	(1,710	)		$	1,931		$	221
		Operating Income, Before Charges											Operating Income, After Charges
		1st Qtr				2nd Qtr			YTD				1st Qtr			2nd Qtr			YTD
Card Services		$	(580	)		$	636		$	56			$	811		$	636		$	1,447
Check Services			225				302			527				208			302			510
		$	(355	)		$	938		$	583			$	1,019		$	938		$	1,957

 

 

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CERTEGY INC.

SUPPLEMENTAL INFORMATION, CONTINUED

(Unaudited)

 

5.

A reconciliation of the first six months of 2003 actual results to results excluding other charges is as follows (in thousands):

 

		Actual				Other Charges				Excluding Charges
Revenues		$	487,561			$	—			$	487,561
Operating expenses			429,203				(12,203	)			417,000
Operating income			58,358				12,203				70,561
Other income, net			983				—				983
Interest expense			(3,309	)			—				(3,309	)
Income before income taxes			56,032				12,203				68,235
Provision of income taxes			(20,872	)			(4,546	)			(25,418	)
Net income		$	35,160			$	7,657			$	42,817
Basic earnings per share		$	0.54			$	0.12			$	0.65
Diluted earnings per share		$	0.53			$	0.12			$	0.65

 

Other charges by segment are as follows:

 

		Card			Check			Corp				Total
Operating income, actual		$	51,825		$	14,973		$	(8,440	)		$	58,358
Contract termination costs			8,757			865			—				9,622
Brazil downsizing			2,740			—			—				2,740
Other severance charges			—			156			—				156
Market value recovery of collateral assignment in life insurance policies			—			—			(315	)			(315	)
Operating income, excluding charges		$	63,322		$	15,994		$	(8,755	)		$	70,561

 

 

6.

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

 

		2002															2003
		1st Qtr			2nd Qtr			3rd Qtr			4th Qtr			Year			1st Qtr			2nd Qtr
Domestic		$	7,107		$	7,662		$	7,683		$	9,197		$	31,649		$	7,145		$	7,499
International			734			805			832			934			3,305			761			811
		$	7,841		$	8,467		$	8,515		$	10,131		$	34,954		$	7,906		$	8,310
Guarantee		$	5,931		$	6,413		$	6,533		$	7,787		$	26,664		$	6,251		$	6,606
Verification			1,910			2,054			1,982			2,344			8,290			1,655			1,704
		$	7,841		$	8,467		$	8,515		$	10,131		$	34,954		$	7,906		$	8,310

 

 

7.

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

 

		2002										2003
		1st Qtr		2nd Qtr		3rd Qtr		4th Qtr				1st Qtr		2nd Qtr
Cards:
Domestic		21,850		22,014		22,246		22,497				22,749		23,010
International		21,317		21,960		23,970		24,182				23,094		22,054
		43,167		43,974		46,216		46,679				45,843		45,064
Accounts:
Domestic		16,699		16,889		17,111		17,089				17,411		17,642
International		18,937		19,302		20,538		20,766				19,977		19,014
		35,636		36,191		37,649		37,855				37,388		36,656

 

 

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CERTEGY INC.

SUPPLEMENTAL INFORMATION, CONTINUED

(Unaudited)

 

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

 

		2002															2003
		1st Qtr			2nd Qtr			3rd Qtr			4th Qtr			Year			1st Qtr			2nd Qtr
Dollars (in millions)		$	2,169		$	2,422		$	2,409		$	1,941		$	8,941		$	1,763		$	1,882
Number of Transactions (in thousands)			30,940			33,658			33,627			25,883			124,108			20,616			21,743

 

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

 

		2002															2003
		1st Qtr			2nd Qtr			3rd Qtr			4th Qtr			Year			1st Qtr			2nd Qtr
Card Services		$	8,111		$	7,918		$	7,961		$	7,896		$	31,886		$	7,715		$	7,999
Check Services			1,809			1,616			1,632			1,515			6,572			1,801			2,001
Corporate			86			97			135			274			592			296			250
		$	10,006		$	9,631		$	9,728		$	9,685		$	39,050		$	9,812		$	10,250

 

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

 

		2002															2003
		1st Qtr			2nd Qtr			3rd Qtr			4th Qtr			Year			1st Qtr			2nd Qtr
Capital expenditures		$	12,137		$	14,713		$	12,847		$	9,264		$	48,961		$	8,432		$	15,138
Acquisitions, net of cash acquired		$	—		$	—		$	—		$	10,433		$	10,433		$	—		$	—

 

11. Third Quarter 2003 Accounting Change

 

FASB Interpretation No. 46, "Consolidation of Variable Interest Entities, an Interpretation of Accounting Research Bulletin No. 51" ("FIN 46"), which was effective July 1, 2003, impacts the accounting for synthetic leases. This new rule requires companies to consolidate and depreciate the leased property, as well as record the underlying debt obligation. While we continue to evaluate the potential impact of this accounting change, we currently estimate the adoption of FIN 46 will result in a cumulative effect of accounting change expense of approximately $0.02 per diluted share in the third quarter of 2003. This will be reported, as required, below EPS before accounting changes. FIN 46 is not expected to have a material impact on the Company's ongoing financial results, as more fully described in our First Quarter 2003 Form 10-Q.