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., a payment processing and check risk management firm spun off from Equifax in July 2001).

Reporting Period: Fiscal year ended December 31, 2002.

Operations: The company operates two primary segments: Card Services (credit/debit card processing, merchant processing, e-banking) and Check Services (check risk management and collections). Operations are conducted in the U.S. and internationally, including the U.K., Brazil, Australia, and Chile.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Revenues increased 7.7% to $1.0 billion, driven by a 14.1% increase in Check Services and a 4.6% increase in Card Services. Currency devaluation (specifically the Brazilian real) reduced reported U.S. dollar revenue growth by approximately $7.5 million.
• Operating Income: Operating income remained relatively flat, increasing only 0.4% to $151.9 million. This stagnation was due to a $12.2 million charge for severance and other items, which offset underlying operational growth.
• Segment Performance:
  • Card Services: Operating income grew 8.0% to $129.4 million. Growth was driven by North American card issuer revenues and merchant processing, partially offset by unfavorable currency rates in Brazil.
  • Check Services: Operating income declined 3.7% to $41.9 million despite a 14.1% revenue increase. The decline was attributed to investments in check cashing initiatives and a shift toward lower-priced national accounts.
• Debt Reduction: Long-term debt decreased by $15.8 million to $214.2 million, aided by lower interest rates and lower average debt balances.

Guidance, Outlook, Risks, and Unusual Items

• Unusual Items (2002 Charges): The company recorded $12.2 million in severance and other charges, including:
  • $5.1 million in asset impairment (including a $4.2 million write-off of a Brazilian customer contract).
  • $4.0 million for the settlement of a class-action lawsuit regarding check service charges.
  • $3.2 million in severance charges due to departmental reorganization.
• Outlook: Management anticipates continued growth in electronic payments and check fraud management. However, they expect operating losses of approximately $1.0 million in the first half of 2003 related to check cashing rollouts, with profitability expected in the second half of 2003.
• Capital Allocation: The company repurchased 3.4 million shares of common stock for $79.6 million in 2002. Capital expenditures totaled $49.0 million (excluding acquisitions).
• Key Risks:
  • International Exposure: Significant vulnerability to currency fluctuations, particularly the Brazilian real and British pound. Brazil operations represent a significant portion of assets and are subject to political and economic instability.
  • Customer Concentration: Approximately 40.8% of revenues are derived from members of the Independent Community Bankers of America (ICBA) and Card Services for Credit Unions (CSCU). Termination of these alliances would be materially adverse.
  • Regulatory: Subject to the Fair Credit Reporting Act and Fair Debt Collection Practices Act; non-compliance could result in fines or restrictions.

Investor Verification Checklist

• Accounting Changes: Verify the impact of adopting SFAS No. 142 (Goodwill) and EITF 01-14 (Reimbursements), which reclassified prior year data and eliminated goodwill amortization.
• Brazilian Operations: Assess the recoverability of the $204 million in net assets in Brazil, given the $113.4 million cumulative translation adjustment and recent customer loss.
• Legal Settlements: Confirm the final court approval of the $3.975 million class-action settlement.
• Contractual Alliances: Review the status of contracts with ICBA and CSCU, which expire in 2007 but represent a significant revenue concentration.
• Non-GAAP Reconciliations: Compare GAAP results with the provided Non-GAAP figures to understand the impact of the spin-off adjustments and goodwill amortization eliminations on historical trends.