FIS

Business Context and Reporting Period

Company: Certegy Inc. (Note: The input metadata references Fidelity National Information Services, but the filing text is for Certegy Inc.)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2003
Business Overview: Certegy provides credit and debit card processing and check risk management services to financial institutions and merchants globally. Operations are divided into two segments: Card Services (issuer services, merchant processing, software) and Check Services (check guarantee and verification).

Key Financial Metrics

Material Changes vs. Prior Period

• Quarterly Performance (Q3 2003 vs. Q3 2002):
  • Revenues increased 0.5% ($1.3 million) to $255.8 million.
  • Operating income increased 16.7% ($6.2 million) to $43.5 million.
  • Net income increased 19.8% ($4.3 million) to $26.3 million.
  • Diluted EPS increased 25.0% to $0.40.
• Year-to-Date Performance (9mo 2003 vs. 9mo 2002):
  • Revenues decreased 0.2% ($1.4 million) to $743.4 million.
  • Operating income decreased 1.5% ($1.5 million) to $101.9 million.
  • Net income increased 0.8% ($0.5 million) to $61.5 million.
• Segment Drivers:
  • Card Services: Revenue declined due to the loss of major customer Banco Real in Brazil and the loss of PayPal in merchant processing. However, North American card issuer revenue grew 15.6% in Q3.
  • Check Services: Revenue grew 5.6% in Q3 and 5.8% YTD, driven by improved domestic check guarantee volumes and strong international growth.

Guidance, Outlook, and Risks

• Capital Structure Changes: In September 2003, the company issued $200 million of 4.75% unsecured notes due in 2008. Proceeds were used to pay off the outstanding balance on a $300 million revolving credit facility. A new $200 million revolving credit facility was established.
• Shareholder Returns: The Board approved an initial quarterly dividend of $0.05 per share. Share repurchase authority was increased to $100 million; approximately $61.2 million remained available as of September 30, 2003.
• Unusual Items and Charges:
  • YTD 2003 included $12.2 million in "Other Charges," primarily $9.6 million for early termination of an EDS data processing contract and $2.7 million for downsizing the Brazilian card operation.
  • Q3 2002 included $9.4 million in charges (asset impairment and litigation settlement), which inflated the year-over-year comparison for operating income.
• Accounting Changes: The company anticipates adopting FIN 46 (Consolidation of Variable Interest Entities) by December 31, 2003. This is expected to result in a one-time cumulative effect expense of approximately $0.02 per diluted share and an ongoing EPS reduction of $0.01 per annum.
• Risks:
  • Brazilian Operations: Significant exposure to currency volatility and economic uncertainty. Loss of Banco Real remains a key factor. Management notes that if profitability is not improved, asset impairment charges may be necessary.
  • Customer Concentration: Reliance on a small number of financial institutions and key strategic relationships.
  • Merchant Risk: Liability for chargebacks if merchants cannot reimburse the company.

Investor Verification Checklist

• Debt Refinancing: Verify the terms and interest rate impact of the new $200 million note issuance and the replacement of the revolving credit facility.
• Brazilian Asset Valuation: Assess the recoverability of the $107.3 million in net assets in Brazil given the loss of Banco Real and currency translation losses.
• FIN 46 Impact: Monitor the Q4 2003 financials for the anticipated $0.02 per share cumulative effect charge related to synthetic lease consolidation.
• Customer Concentration: Review the impact of the PayPal loss on future merchant processing revenue stability.
• Share Repurchases: Track the utilization of the remaining $61.2 million repurchase authority and its effect on diluted share count.