CEY Certegy

ST. PETERSBURG, Fla., Oct. 25 /PRNewswire-FirstCall/ -- Certegy Inc. (NYSE:CEY) today reported third quarter 2005 diluted earnings per share of $0.37, including income from discontinued operations of $0.01 per diluted share and direct merger and acquisition costs of $(0.11) per diluted share. During the third quarter of 2005, the Company incurred investment banking, legal, accounting and other direct costs of $6.1 million related to its pending merger with Fidelity National Information Services, Inc. and $0.9 million related to the possible formation and acquisition of a majority ownership in a card and merchant processing joint venture in Brazil, which is currently under exclusive negotiation with two leading Brazilian banks. The ultimate tax treatment of these costs cannot be determined with adequate certainty; therefore, no tax benefit has been recorded. Third quarter 2005 results prepared in accordance with generally accepted accounting principles ("GAAP") are reconciled with non-GAAP results excluding these merger and acquisition (M&A) costs, as follows: (In thousands, except per M&A share amounts) GAAP COSTS Non-GAAP Income from continuing operations before income taxes $40,567 $(7,010) $47,577 Provision for income taxes (17,900) - (17,900) Income from continuing operations 22,667 (7,010) 29,677 Income from discontinued operations 602 - 602 Net income $23,269 $(7,010) $30,279 Diluted earnings per share: Income from continuing operations $0.36 $(0.11) $0.47 Income from discontinued operations 0.01 - 0.01 Net income $0.37 $(0.11) $0.48 THIRD QUARTER FINANCIAL HIGHLIGHTS Summarized highlights of the 2005 third quarter results from continuing operations, as compared to the third quarter of 2004, are as follows: - Revenue increased 7.7% to $282.8 million. - Card Services increased 11.4%. - Check Services increased 2.8%. - Operating income of $43.0 million includes $7.0 million of merger and acquisition costs. On a non-GAAP basis, excluding the merger and acquisition costs, operating income increased 12.1% to $50.0 million. - Card Services increased 2.6% (5.1% non-GAAP). - Check Services increased 22.6%. - Corporate expense increased 97.0% (decreased 2.6% non-GAAP). - Income from continuing operations was $22.7 million. On a non-GAAP basis, income from continuing operations increased 14.4% to $29.7 million. - Diluted earnings per share from continuing operations was $0.36. On a non-GAAP basis, diluted earnings per share from continuing operations increased 14.6% to $0.47. - Capital expenditures totaled $14.8 million. "The underlying fundamentals in each of our businesses remain strong, despite a challenging retail environment. We are particularly pleased with the new business signings and the growth prospects in our international card operation," said Lee A. Kennedy, chairman and chief executive officer of Certegy Inc. "In addition, the pending merger with Fidelity National Information Services, Inc., will provide additional growth opportunities for our company and further strengthen our competitive position." SEGMENT RESULTS Card Services generated revenue of $166.5 million in the third quarter of 2005, an increase of 11.4% above the 2004 quarter. Revenue growth of 10.9% in the Company's North American card operation was the result of growth in card processing services, e-payments (Internet banking and electronic bill payment), and institution merchant processing. North American card transactions increased 5.2%, driven by 5.1% growth in number of cards processed. Higher adoption of loyalty programs resulted in 14.1% growth in card enhancement revenue. Internet banking subscribers increased 18.2% and electronic bill payment users increased 31.9%. Institution merchant processing volumes increased 20.8%, driven by 14.0% growth in transactions and higher average ticket. International card revenue increased 13.2%, primarily due to growth within existing customers in Latin America and Asia-Pacific. The favorable net impact of currency rates was offset by lower revenue in the U.K. caused by the previously announced bankruptcy of a full-service customer. Card Services operating income of $36.7 million increased 2.6%, compared to $35.8 million in the third quarter of 2004. During the third quarter of 2005, the Company incurred $0.9 million of investment banking, legal, accounting and other direct costs in connection with the on-going exclusive negotiation with two leading Brazilian banks regarding the possible formation and acquisition of a majority ownership in a card and merchant processing joint venture. Excluding these costs from the third quarter results, Card Services' operating income increased 5.1% to $37.6 million. Card Services operating margin of 22.0% in the third quarter of 2005 decreased by 190 basis points compared to an operating margin of 23.9% in the prior year quarter, primarily due to joint venture formation costs and product mix shift driven by strongest revenue growth coming from products and services with margins lower than the overall Card Services average margin. The Company announced that it has finalized a multi-year transaction processing agreement with Lafayette Services, S.A. ("LaSer"), a leading European retail specialist service group to provide card and loan transaction processing services to LaSer Subsidiaries in the U.K., Spain, Portugal, Belgium and Holland. Check Services generated revenue of $116.2 million in the third quarter of 2005, an increase of 2.8% over the 2004 quarter. New customer additions and strong growth in cash access services were partially offset by unfavorable currency rates and lower than expected check guarantee volumes. Cash access transactions and check volumes were negatively impacted by the Gulf Coast storms and the resulting impact of rising energy prices on retail spending. Check Services operating income of $18.4 million increased 22.6% compared to $15.0 million in the third quarter of 2004. Check Services operating margin of 15.8% in the third quarter of 2005 increased by 260 basis points compared to an operating margin of 13.2% in the prior year quarter. Certegy's proprietary risk modeling technology, improved collection techniques and higher cash access profitability drove the margin expansion in Check Services. Corporate expense of $12.0 million increased by $5.9 million over the prior year quarter. The increase is attributable to $6.1 million of investment banking, legal, accounting and other direct costs related to the pending merger with Fidelity National Information Services, Inc. Excluding these costs from the third quarter results, Corporate expense of $6.0 million was $0.2 million below the prior year quarter, due largely to favorable annual insurance premium renewals, effective July 1, 2005, and lower stock option expense. Interest expense of $3.1 million in the third quarter of 2005 compared to $3.3 million in the third quarter of 2004. Other income, which is primarily comprised of interest income, totaled $0.7 million in the third quarter of 2005 compared to $0.3 million in the third quarter of 2004. Interest income increased due to higher average cash balances and higher interest rates. The effective tax rate of 44.1% in the third quarter of 2005 reflects the impact of not recognizing a tax benefit associated with the merger and acquisition costs of $7.0 million incurred during the quarter. Excluding these costs, the effective tax rate was 37.6% on a non-GAAP basis. SALE OF MERCHANT ACQUIRING BUSINESS In September 2005, Certegy completed the sale of its remaining discontinued merchant acquiring portfolio for $3.0 million of cash, which approximated net book value at date of sale. OUTLOOK Management provided its non-GAAP earnings outlook for the fourth quarter of 2005 as follows. This guidance is based on the Company's continuing operations only, and excludes merger and acquisition costs: - Revenue growth of approximately 6% to 8%, driven by upper single-digit revenue growth in Card Services and low to mid single-digit growth in Check Services. - Diluted earnings per share from continuing operations of $0.60 to $0.62, representing growth of 13.2% to 17.0% over $0.53 in 2004. TELECONFERENCE Management will host a teleconference to discuss third quarter earnings on Tuesday, October 25, 2005, at 9:00 a.m. Eastern Time. The live audio Webcast will be available at http://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 http://www.microsoft.com/windows/mediaplayer. A replay of the Webcast will be available in the Investor Center section of the website after the call ends continuing through November 8, 2005. About Certegy Certegy Inc. (NYSE:CEY) provides credit and debit processing, check risk management and check cashing services, merchant processing and e-banking services to over 6,000 financial institutions, 100,000 retailers and 100 million consumers worldwide. Headquartered in St. Petersburg, Florida, Certegy maintains a strong global presence with operations in the United States, United Kingdom, Ireland, France, Chile, Brazil, Australia, New Zealand, Thailand and the Caribbean. 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 over $1.0 billion in revenue in 2004. For more information on Certegy, please visit http://www.certegy.com/. Forward-Looking Statements The statements in this release include forward-looking statements that are based on current expectations, assumptions, estimates, and projections about Certegy and our industry. Without limitation, Certegy's revenue, operating income and earnings per share projections for fiscal 2005 under the heading "Outlook" above are forward-looking statements. Forward-looking statements 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. Factors that could, either individually or in the aggregate, affect our performance include: our reliance on a small number of business segments and strategic relationships; our ability to comply with bankcard association rules and government regulations; the sensitivity of our business to the economy; declines in check writing; and other factors described in detail in the section entitled "Certain Factors Affecting Forward-Looking Statements" in our 2004 Annual Report on Form 10-K filed on March 11, 2005, with the SEC. CERTEGY INC. CONSOLIDATED STATEMENTS OF INCOME FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004 (In thousands, except per share amounts) (Unaudited) Three Months Ended September 30, 2005 2004 Revenues $282,774 $262,660 Operating expenses: Costs of services 201,997 186,516 Selling, general and administrative 30,749 31,505 Merger and acquisition costs (1) 7,010 - 239,756 218,021 Operating income 43,018 44,639 Other income, net 671 294 Interest expense (3,122) (3,259) Income from continuing operations before income taxes 40,567 41,674 Provision for income taxes (17,900) (15,733) Income from continuing operations 22,667 25,941 Income from discontinued operations, net of taxes of $0.4 million and $0.8 million, respectively 602 1,325 Net income $23,269 $27,266 Basic earnings per share: Income from continuing operations $0.37 $0.41 Income from discontinued operations 0.01 0.02 Net income $0.38 $0.44 Average shares outstanding 62,017 62,588 Diluted earnings per share: Income from continuing operations $0.36 $0.41 Income from discontinued operations 0.01 0.02 Net income $0.37 $0.43 Average shares outstanding 63,313 63,849 Revenues and operating income of the Company's reportable segments for the three months ended September 30, 2005 and 2004 are as follows: Three Months Ended September 30, Revenues: 2005 2004 Card Services $166,536 $149,542 Check Services 116,238 113,118 $282,774 $262,660 Operating income: Card Services $36,688 $35,767 Check Services 18,378 14,987 55,066 50,754 General corporate expense (12,048) (6,115) $43,018 $44,639 (1) Merger and acquisition costs include investment banking, legal, accounting and other direct costs of $6.1 million related to our pending merger with Fidelity National Information Services, Inc. and $0.9 million related to the possible formation and acquisition of a majority ownership in a card and merchant processing joint venture in Brazil. CERTEGY INC. CONSOLIDATED STATEMENTS OF INCOME FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004 (In thousands, except per share amounts) (Unaudited) Nine Months Ended September 30, 2005 2004 Revenues $821,255 $757,664 Operating expenses: Costs of services 588,755 548,293 Selling, general and administrative 100,751 97,319 Merger and acquisition costs (1) 8,302 - 697,808 645,612 Operating income 123,447 112,052 Other income, net 1,412 599 Interest expense (9,677) (9,388) Income from continuing operations before income taxes 115,182 103,263 Provision for income taxes (45,969) (39,188) Income from continuing operations 69,213 64,075 Income from discontinued operations, net of taxes of $16.4 million and $2.4 million, respectively 24,796 4,133 Net income $94,009 $68,208 Basic earnings per share: Income from continuing operations $1.12 $1.02 Income from discontinued operations 0.40 0.07 Net income $1.52 $1.08 Average shares outstanding 61,904 63,114 Diluted earnings per share: Income from continuing operations $1.10 $1.00 Income from discontinued operations 0.39 0.06 Net income $1.49 $1.06 Average shares outstanding 63,189 64,283 Revenues and operating income of the Company's reportable segments for the nine months ended September 30, 2005 and 2004 are as follows: Nine Months Ended September 30, Revenues: 2005 2004 Card Services $484,592 $433,124 Check Services 336,663 324,540 $821,255 $757,664 Operating income: Card Services $102,987 $97,348 Check Services 48,826 34,670 151,813 132,018 General corporate expense (28,366) (19,966) $123,447 $112,052 (1) Merger and acquisition costs include investment banking, legal, accounting and other direct costs of $6.6 million related to our pending merger with Fidelity National Information Services, Inc. and $1.7 million related to the possible formation and acquisition of a majority ownership in a card and merchant processing joint venture in Brazil. CERTEGY INC. SUPPLEMENTAL INFORMATION (Unaudited) 1. Revenues by product and service offering are as follows (in thousands): 2004 1st Qtr 2nd Qtr 3rd Qtr 4th Qtr Year Card Issuer Services $117,862 $123,410 $126,762 $134,562 $502,596 Check Services 100,686 110,736 113,118 124,584 449,124 Merchant Processing 19,294 20,225 21,232 21,023 81,774 Software and Support 1,498 1,293 1,548 1,673 6,012 $239,340 $255,664 $262,660 $281,842 $1,039,506 2005 1st Qtr 2nd Qtr 3rd Qtr Card Issuer Services $128,727 $135,559 $137,253 Check Services 108,502 111,923 116,238 Merchant Processing 22,756 26,008 27,072 Software and Support 2,473 2,533 2,211 $262,458 $276,023 $282,774 2. Revenues by geographic area (based on location of customer) are as follows (in thousands): 2004 1st Qtr 2nd Qtr 3rd Qtr 4th Qtr Year Domestic $197,478 $215,295 $217,183 $231,947 $861,903 International 41,862 40,369 45,477 49,895 177,603 $239,340 $255,664 $262,660 $281,842 $1,039,506 2005 1st Qtr 2nd Qtr 3rd Qtr Domestic $215,372 $227,631 $233,019 International 47,086 48,392 49,755 $262,458 $276,023 $282,774 3. Revenues are comprised of the following (in thousands): 2004 1st Qtr 2nd Qtr 3rd Qtr 4th Qtr Year Product and Service Fees $204,509 $217,713 $225,440 $245,947 $893,609 Interchange Fees 16,054 16,917 17,978 18,054 69,003 Reimbursable Expenses 18,777 21,034 19,242 17,841 76,894 $239,340 $255,664 $262,660 $281,842 $1,039,506 2005 1st Qtr 2nd Qtr 3rd Qtr Product and Service Fees $221,290 $230,042 $236,519 Interchange Fees 19,678 22,787 23,470 Reimbursable Expenses 21,490 23,194 22,785 $262,458 $276,023 $282,774 4. Currency translation increased (decreased) revenues and operating income for the three months and nine months ended September 30, 2005 as compared with the prior year as follows (in thousands): Revenues 1st Qtr 2nd Qtr 3rd Qtr YTD Card Services $925 $2,215 $2,536 $5,676 Check Services 557 504 (307) 754 $1,482 $2,719 $2,229 $6,430 Operating Income 1st Qtr 2nd Qtr 3rd Qtr YTD Card Services $(217) $(395) $(388) $(1,000) Check Services 64 116 (64) 116 $(153) $(279) $(452) $(884) 5. Check volumes in dollars are as follows (in millions): 2004 1st Qtr 2nd Qtr 3rd Qtr 4th Qtr Year Domestic $8,206 $8,623 $8,719 $10,961 $36,509 International 925 904 917 1,065 3,811 $9,131 $9,527 $9,636 $12,026 $40,320 Guarantee $7,048 $7,248 $7,207 $8,548 $30,051 Verification 2,083 2,279 2,429 3,478 10,269 $9,131 $9,527 $9,636 $12,026 $40,320 2005 1st Qtr 2nd Qtr 3rd Qtr Domestic $10,702 $11,927 $12,250 International 840 870 853 $11,542 $12,797 $13,103 Guarantee $6,960 $7,159 $7,484 Verification 4,582 5,638 5,619 $11,542 $12,797 $13,103 6. Number of cards and accounts processed (end of period) are as follows (in thousands): 2004 1st Qtr 2nd Qtr 3rd Qtr 4th Qtr Cards: Domestic 23,466 23,843 23,846 23,846 International 23,359 24,244 23,763 25,026 46,825 48,087 47,609 48,872 Accounts: Domestic 18,069 18,254 17,033 17,032 International 20,282 21,044 20,620 21,972 38,351 39,298 37,653 39,004 2005 1st Qtr 2nd Qtr 3rd Qtr Cards: Domestic 24,239 24,692 25,052 International 26,076 26,422 27,344 50,315 51,114 52,396 Accounts: Domestic 17,314 17,637 17,894 International 22,739 22,992 23,526 40,053 40,629 41,420 7. Merchant volumes in dollars and number of transactions are as follows: 2004 1st Qtr 2nd Qtr 3rd Qtr 4th Qtr Year Dollars (in millions) $864 $931 $989 $937 $3,721 Number of Transactions (in thousands) 9,291 10,385 10,777 10,278 40,731 2005 1st Qtr 2nd Qtr 3rd Qtr Dollars (in millions) $1,013 $1,151 $1,195 Number of Transactions (in thousands) 10,500 12,072 12,287 8. Depreciation and amortization by segment is as follows (in thousands): 2004 1st Qtr 2nd Qtr 3rd Qtr 4th Qtr Year Card Services $7,985 $8,067 $8,722 $9,280 $34,054 Check Services 2,784 2,953 3,175 3,202 12,114 Corporate 315 322 320 324 1,281 $11,084 $11,342 $12,217 $12,806 $47,449 2005 1st Qtr 2nd Qtr 3rd Qtr Card Services $9,025 $9,360 $9,390 Check Services 3,178 3,213 3,262 Corporate 326 311 287 $12,529 $12,884 $12,939 9. Capital expenditures and acquisitions are as follows (in thousands): 2004 1st Qtr 2nd Qtr 3rd Qtr 4th Qtr Year Capital expenditures $7,026 $10,083 $11,373 $12,426 $40,908 Acquisitions, net of cash acquired $33,391 $(433) $8,063 $(300) $40,721 2005 1st Qtr 2nd Qtr 3rd Qtr Capital expenditures $12,037 $16,082 $14,764 Acquisitions, net of cash acquired $- $- $1,000 In the third quarter of 2005, Certegy paid $1.0 million for a purchase price adjustment related to a prior acquisition. 10. Long-term debt at September 30, 2005 and December 31, 2004 consists of (in thousands): Sep 30, Dec 31, 2005 2004 Unsecured notes, 4.75%, due 2008, net of unamortized discount $199,636 $199,543 Borrowings under revolving credit facility - 48,600 Notes payable, variable rate, due 2009 22,364 22,364 Capital lease obligations 3,864 3,461 $225,864 $273,968 11. Adoption of Statement of Financial Accounting Standards No. 123 (revised 2004), "Share-Based Payment": The Company adopted SFAS No. 123 (revised 2004) on January 1, 2005 using the modified retrospective method, restating all prior periods. SFAS No. 123(R) requires the Company to expense stock options issued to employees. Previously, the Company did not record compensation expense for employee stock options. Prior year periods are restated using the pro forma amounts previously disclosed in the Company's consolidated financial statements under SFAS No. 123. Stock option expense for 2005 and 2004 is as follows: 2004 1st Qtr 2nd Qtr 3rd Qtr 4th Qtr Year Stock option expense $3,557 $2,769 $2,414 $2,418 $11,158 Income tax benefit (1,022) (651) (580) (707) (2,960) $2,535 $2,118 $1,834 $1,711 $8,198 Diluted EPS $0.04 $0.03 $0.03 $0.03 $0.13 2005 1st Qtr 2nd Qtr 3rd Qtr Stock option expense $1,520 $1,524 $1,371 Income tax benefit (415) (430) (371) $1,105 $1,094 $1,000 Diluted EPS $0.02 $0.02 $0.02 During 2005, the quarterly impact of SFAS No. 123(R) is expected to be approximately $0.02 per diluted share, amounting to approximately $0.08 per diluted share for the full year 2005. Stock option expense for 2005 and 2004, by segment, is as follows: 2004 1st Qtr 2nd Qtr 3rd Qtr 4th Qtr Year Card Services $1,351 $1,052 $917 $919 $4,239 Check Services 717 558 487 487 2,249 Corporate 1,489 1,159 1,010 1,012 4,670 $3,557 $2,769 $2,414 $2,418 $11,158 2005 1st Qtr 2nd Qtr 3rd Qtr Card Services $578 $554 $537 Check Services 306 $331 $272 Corporate 636 639 562 $1,520 $1,524 $1,371 12. Sale of Retail Merchant Acquiring Business: On June 1, 2005, the Company sold a majority of its retail merchant acquiring business. On September 1, 2005, the Company sold the remainder of the business. Income from discontinued operations for 2005 and 2004 is comprised of: 2004 1st Qtr 2nd Qtr 3rd Qtr 4th Qtr Year Income from operations $2,019 $2,438 $2,103 $2,969 $9,529 Gain on sale - - - - - Write-down of portfolio to realizable value - - - - - 2,019 2,438 2,103 2,969 9,529 Income taxes (747) (902) (778) (1,168) (3,595) $1,272 $1,536 $1,325 $1,801 $5,934 2005 1st Qtr 2nd Qtr 3rd Qtr Income from operations $3,260 $2,721 $962 Gain on sale - 45,433 - Write-down of portfolio to realizable value - (11,167) - 3,260 36,987 962 Income taxes (1,219) (14,834) (360) $2,041 $22,153 $602 13. Merger and Acquisition Costs: Merger and acquisition costs in the third quarter of 2005 were comprised of the following: Merger with Joint Venture Fidelity National Formation and Information Acquisition in Services Brazil Investment banking fees $3,614 $60 Legal fees 1,833 354 Accounting fees 396 196 Consulting and other costs 250 307 $6,093 $917 The ultimate tax treatment of these costs cannot be determined with adequate certainty; therefore, no tax benefit has been recorded. In addition, the first and second quarters of 2005 included $0.3 million and $1.0 million, respectively, of costs directed toward developing these strategic transactions. DATASOURCE: Certegy Inc. CONTACT: Mary Waggoner, SVP - Investor Relations of Certegy Inc., +1-678-867-8004 Web site: http://www.certegy.com/

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