FIS

Business Context and Reporting Period

Company: Certegy Inc. (Note: Request metadata referenced Fidelity National Information Services, but the provided filing text is for Certegy Inc.)
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2003
Business Overview: Certegy provides credit/debit card processing and check risk management services globally through two segments: Card Services (63% of revenue) and Check Services (37% of revenue). The company spun off from Equifax in July 2001 and operates in the U.S., U.K., Brazil, Australia, and other international markets.

Key Financial Metrics (Year Ended Dec 31, 2003)

Material Changes vs. Prior Period

• Revenue Growth: Consolidated revenue increased 0.7% to $1.015 billion. This growth was driven by a 6.9% increase in Check Services revenue, which offset a 2.5% decline in Card Services revenue.
• Segment Performance:
  • Card Services: Revenue declined due to the loss of a large Brazilian customer (deconversion in March 2003) and a large merchant processing customer (acquired in Q3 2002). However, North American card issuing revenue grew 12.3%.
  • Check Services: Revenue grew 6.9% driven by volume growth and new customer signings in domestic and international operations.
• Other Charges: The company recorded $12.2 million in "other charges" in 2003 (same as 2002). Key 2003 items included $9.6 million for early termination of a U.S. data processing contract and $2.7 million for downsizing the Brazilian card operation.
• Accounting Changes: Adoption of FIN 46 regarding a synthetic lease resulted in a $1.3 million after-tax cumulative effect charge, reducing net income.
• Debt Restructuring: In September 2003, the company issued $200 million of 4.75% senior unsecured notes due in 2008 to pay off its revolving credit facility.

Guidance, Outlook, and Risks

• Outlook: Management expects strong cash flow in 2004. Capital expenditures are projected at approximately $45 million. The company plans to use remaining cash flow for share repurchases (approx. $40.1 million authority remaining) and dividends.
• Dividends: The company initiated a quarterly dividend of $0.05 per share in Q3 2003.
• Key Risks:
  • Customer Concentration: Approximately 22.9% of 2003 revenue was derived from member institutions of two key alliances (ICBA and CSCU). Termination of these contracts would be materially adverse.
  • Foreign Currency: Significant exposure to the Brazilian real and British pound. A 10% appreciation of the U.S. dollar would have reduced 2003 revenue by $15.6 million.
  • Check Volume Decline: Long-term decline in check writing due to the rise of electronic payments poses a risk to the Check Services segment.
  • System Security: Risks associated with database breaches and system failures could harm reputation and result in liability.

Investor Verification Checklist

• Customer Concentration: Verify the status and renewal terms of the exclusive alliances with ICBA and CSCU, which represent nearly 23% of revenue.
• Brazilian Operations: Assess the impact of the lost large customer and the downsizing charges on future profitability in the Brazilian market, given the currency volatility.
• Debt Covenants: Review the financial covenants (interest coverage and funded debt to cash flow) in the new $200 million revolving credit facility and the 4.75% notes.
• Loss Reserves: Evaluate the adequacy of reserves for card merchant processing chargebacks and check guarantee losses, as actual losses could exceed estimates based on economic conditions.
• Share Repurchases: Monitor the execution of the remaining $40.1 million share repurchase authority and its impact on earnings per share.