Certegy Inc. 10-Q Summary: Quarter Ended September 30, 2001
Business Context and Reporting Period
This filing covers the quarterly period ended September 30, 2001, for Certegy Inc. (formerly the Payment Services division of Equifax Inc.). The company was spun off from Equifax on July 7, 2001, and began public trading on July 9, 2001. Certegy operates in two primary segments: Card Services (issuer and merchant processing) and Check Services (risk management and processing). The company serves financial institutions and merchants globally, with significant operations in the U.S., U.K., Brazil, and Australia.
Key Financial Metrics
| Metric | Q3 2001 | Q3 2000 | 9M 2001 | 9M 2000 |
|---|---|---|---|---|
| Revenue | $218.0 million | $194.7 million | $618.4 million | $565.3 million |
| Operating Income | $42.7 million | $41.4 million | $105.1 million | $101.9 million |
| Net Income | $24.1 million | $24.9 million | $60.6 million | $62.3 million |
| Diluted EPS | $0.35 | $0.37 | $0.89 | $0.93 |
| Operating Margin | 19.6% | 21.3% | 17.0% | 18.0% |
| Cash & Equivalents | $43.2 million (as of Sept 30, 2001) | |||
| Long-Term Debt | $260.0 million (as of Sept 30, 2001) |
Liquidity: The company holds $43.2 million in cash and cash equivalents. It secured $400 million in unsecured credit facilities in July 2001, utilizing $275 million to fund the cash payment to Equifax during the spin-off.
Material Changes vs. Prior Period
- Revenue Growth: Q3 2001 revenue increased 12.0% year-over-year, driven by higher transaction volumes in both Card and Check Services. The acquisition of Accu Chek in August 2001 contributed $1.7 million in revenue.
- Impact of September 11 Attacks: Management estimates the terrorist attacks reduced Q3 2001 revenue by $2.3 million and operating income by $1.1 million. Check Services was more significantly impacted than Card Services.
- Foreign Exchange: A strengthening U.S. dollar reduced reported revenue growth by $6.9 million in Q3 and $17.1 million for the nine-month period, primarily due to fluctuations in the British pound and Brazilian real.
- Expense Increases: Operating expenses rose 14.4% in Q3. This includes higher costs of services due to volume growth and increased check guarantee loss rates. Additionally, the company incurred $1.7 million in incremental corporate expenses as a stand-alone public entity.
- Interest Expense: Interest expense surged to $3.7 million in Q3 2001 (from $0.4 million in Q3 2000) due to debt incurred to finance the spin-off distribution.
Guidance, Outlook, and Risks
- Outlook: Management expects total capital expenditures (excluding acquisitions) to approximate $48 million for the full year 2001. The company believes current cash, operating cash flows, and available credit facilities are sufficient for foreseeable needs.
- Accounting Changes: The company will adopt SFAS 142 (Goodwill and Other Intangible Assets) effective January 1, 2002, which eliminates goodwill amortization. Had this been effective in 2001, EPS would have increased by approximately $0.08 for the nine-month period.
- Risks: Key risks include foreign currency exchange rate fluctuations (specifically the Brazilian real and British pound), general economic downturns affecting consumer spending, and higher check guarantee loss rates. The company does not currently use derivatives to hedge currency risk.
- Unusual Items: The filing includes pro forma financial statements reflecting the spin-off as if it occurred on January 1, 2000. Pro forma EPS for Q3 2001 was $0.31 compared to historical $0.35.
Investor Verification Checklist
- Spin-off Adjustments: Verify the impact of the $275 million cash payment to Equifax and the associated $260 million debt on future interest obligations.
- Check Loss Rates: Monitor the trend in check guarantee loss rates, which have negatively impacted Check Services margins in 2001.
- Currency Exposure: Assess the sensitivity of international revenue (approx. 19% of total) to fluctuations in the Brazilian real and British pound.
- Post-9/11 Recovery: Confirm that transaction volumes have fully recovered from the temporary decline following the September 11 attacks.
- Acquisition Integration: Review the performance contribution of the Accu Chek acquisition to Check Services revenue and margins.