CEY Certegy

ST. PETERSBURG, Fla., Jan. 27 /PRNewswire-FirstCall/ -- Certegy Inc. (NYSE:CEY) today reported fourth quarter 2005 diluted earnings per share of $0.57, including direct merger and acquisition costs of $2.9 million. On a non-GAAP basis, diluted earnings per share from continuing operations increased 15.1% to $0.61. Consolidated revenue increased 5.0% to $295.9 million. During the fourth quarter of 2005, the company incurred legal, accounting and other direct costs of $1.649 million related to its pending merger with Fidelity National Information Services, Inc. and $1.211 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. Fourth 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 share amounts) M&A Non- GAAP COSTS GAAP Income from continuing operations before income taxes and equity in earnings of unconsolidated entity $59,376 $(2,860) $62,236 Provision for income taxes (22,958) - (22,958) Equity in earnings of unconsolidated entity (117) - (117) Income from continuing operations 36,301 (2,860) 39,161 Income from discontinued operations 9 - 9 Net income $36,310 $ (2,860) $39,170 Diluted earnings per share: Income from continuing operations $0.57 $0.61 Income from discontinued operations - - Net income $0.57 $0.61 FOURTH QUARTER FINANCIAL HIGHLIGHTS Summarized highlights of the 2005 fourth quarter results, as compared to the fourth quarter of 2004, are as follows: * Revenue increased 5.0% to $295.9 million. - Card Services increased 6.5%. - Check Services increased 3.1%. * Operating income of $61.5 million, which includes $2.9 million of merger and acquisition costs, increased 9.0%. On a non-GAAP basis, excluding the merger and acquisition costs, operating income increased 14.0% to $64.4 million. - Card Services increased 5.9% (9.0% non-GAAP). - Check Services increased 12.8%. - Corporate expense increased 5.0% (decreased 19.9% non-GAAP). * Income from continuing operations was $36.3 million, an increase of 8.0% over the prior year. On a non-GAAP basis, income from continuing operations increased 16.5% to $39.2 million. * Diluted earnings per share from continuing operations was $0.57. On a non-GAAP basis, diluted earnings per share from continuing operations increased 15.1% to $0.61. * Capital expenditures totaled $20.7 million. "We are pleased with the overall margin expansion and strong growth in earnings per share. All of our businesses are on solid ground going into 2006, and we remain very encouraged with our continued progress in developing new customer relationships and expanding our product offerings. We are especially pleased to announce a seven-year extension of our card processing agreement with the National Australia Bank," stated Lee A. Kennedy, chairman and chief executive officer of Certegy. "Looking to the future, we are extremely excited about the opportunity to further leverage our products across the Fidelity National customer base around the globe." SEGMENT RESULTS Card Services generated revenue of $167.4 million in the fourth quarter of 2005, an increase of 6.5% above the 2004 quarter. Revenue growth of 4.3% in the Company's North American card operation was the result of strong growth in e-payments (Internet banking and electronic bill payment) and institution merchant processing. The 1.9% increase in North American card issuing revenue is lower than prior 2005 quarterly growth rates due to $6.5 million of card activation fees in the 2004 fourth quarter. North American card transactions increased 4.7%, driven by 7.0% growth in the number of cards processed. Internet banking subscribers increased 17.5% and electronic bill payment users increased 28.1%. Institution merchant processing volumes increased 15.2%, driven by 12.9% growth in transactions and higher average ticket. International card revenue increased 16.3%, 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 $41.2 million increased 5.9%, compared to $38.9 million in the fourth quarter of 2004. During the fourth quarter of 2005, the Company incurred $1.2 million of 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 fourth quarter results, Card Services operating income increased 9.0% to $42.5 million. Card Services operating margin of 24.6% in the fourth quarter of 2005 decreased by 20 basis points compared to an operating margin of 24.8% in the prior year quarter, primarily due to the joint venture formation costs described above. Excluding these costs, on a non-GAAP basis, Card Services operating margin was 25.4% in the fourth quarter of 2005, a 60 basis point increase over the prior year quarter. The company also finalized a seven-year extension of its card processing contract with National Australia Bank. Check Services generated revenue of $128.5 million in the fourth quarter of 2005, an increase of 3.1% over the 2004 quarter. Strong underlying growth in the company's cash access business was partially offset by the residual effects of the Gulf Coast storms on the company's gaming operation, a previously announced contract termination and unfavorable currency exchange rates. Check Services operating income of $27.2 million increased 12.8% compared to $24.1 million in the fourth quarter of 2004. Check Services operating margin of 21.2% in the fourth quarter of 2005 increased by 180 basis points compared to an operating margin of 19.4% in the prior year quarter. Certegy's proprietary risk modeling technology, improved collection techniques and higher profitability in cash access services drove the margin expansion in Check Services. Corporate expense of $6.9 million in the fourth quarter of 2005 included $1.6 million of legal, accounting and other direct costs related to the pending merger with Fidelity National Information Services, Inc. Excluding these costs from the fourth quarter results, corporate expense of $5.3 million was $1.3 million below the prior year quarter, due largely to lower stock option expense and other compensation costs, and lower Sarbanes-Oxley compliance related costs. Interest expense was $3.2 million in the fourth quarter of 2005 compared to $3.5 million in the fourth quarter of 2004. Other income, which is primarily comprised of interest income, increased to $1.0 million in the fourth quarter of 2005 compared to $0.6 million in the fourth quarter of 2004 due to higher average cash balances and higher interest rates. The effective tax rate of 38.7% in the fourth quarter of 2005 reflects the impact of not recognizing a tax benefit associated with the merger and acquisition costs of $2.9 million incurred during the quarter. Excluding these costs, the effective tax rate was 36.9% on a non-GAAP basis. TELECONFERENCE Management will host a teleconference to discuss fourth quarter earnings on Friday, January 27, 2006, 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 February 14, 2006. 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 $1.1 billion in revenue in 2005. 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. 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 DECEMBER 31, 2005 AND 2004 (In thousands, except per share amounts) (Unaudited) Three Months Ended December 31, 2005 2004 Revenues $295,886 $281,842 Operating expenses: Costs of services 202,826 193,038 Selling, general and administrative 28,692 32,360 Merger and acquisition costs (1) 2,860 - 234,378 225,398 Operating income 61,508 56,444 Other income, net 1,023 608 Interest expense (3,155) (3,526) Income from continuing operations before income taxes and equity in earnings of unconsolidated entity 59,376 53,526 Provision for income taxes (22,958) (19,923) Equity in earnings of unconsolidated entity (117) - Income from continuing operations 36,301 33,603 Income from discontinued operations, net of taxes of $5 thousand and $1.2 million, respectively 9 1,801 Net income $36,310 $35,404 Basic earnings per share: Income from continuing operations $0.58 $0.54 Income from discontinued operations 0.00 0.03 Net income $0.58 $0.57 Average shares outstanding 62,326 61,935 Diluted earnings per share: Income from continuing operations $0.57 $0.53 Income from discontinued operations 0.00 0.03 Net income $0.57 $0.56 Average shares outstanding 63,796 62,966 Revenues and operating income of the Company's reportable segments for the three months ended December 31, 2005 and 2004 are as follows: Three Months Ended December 31, Revenues: 2005 2004 Card Services $167,428 $157,258 Check Services 128,458 124,584 $295,886 $281,842 Operating income: Card Services $41,249 $38,939 Check Services 27,203 24,117 68,452 63,056 General corporate expense (6,944) (6,612) $61,508 $56,444 (1) Merger and acquisition costs include investment banking, legal, accounting and other direct costs of $1.6 million related to our pending merger with Fidelity National Information Services, Inc. and $1.2 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 TWELVE MONTHS ENDED DECEMBER 31, 2005 AND 2004 (In thousands, except per share amounts) Twelve Months Ended December 31, 2005 2004 (Unaudited) Revenues $1,117,141 $1,039,506 Operating expenses: Costs of services 791,581 741,331 Selling, general and administrative 129,443 129,679 Merger and acquisition costs (1) 11,162 - 932,186 871,010 Operating income 184,955 168,496 Other income, net 2,435 1,207 Interest expense (12,832) (12,914) Income from continuing operations before income taxes and equity in earnings of unconsolidated entity 174,558 156,789 Provision for income taxes (68,927) (59,111) Equity in earnings of unconsolidated entity (117) - Income from continuing operations 105,514 97,678 Income from discontinued operations, net of taxes of $16.4 million and $3.6 million, respectively 24,805 5,934 Net income $130,319 $103,612 Basic earnings per share: Income from continuing operations $1.70 $1.55 Income from discontinued operations 0.40 0.09 Net income $2.10 $1.65 Average shares outstanding 62,011 62,818 Diluted earnings per share: Income from continuing operations $1.66 $1.53 Income from discontinued operations 0.39 0.09 Net income $2.06 $1.62 Average shares outstanding 63,391 63,966 Revenues and operating income of the Company's reportable segments for the twelve months ended December 31, 2005 and 2004 are as follows: Twelve Months Ended December 31, 2005 2004 (Unaudited) Revenues: Card Services $652,020 $590,382 Check Services 465,121 449,124 $1,117,141 $1,039,506 Operating income: Card Services $144,236 $136,287 Check Services 76,029 58,787 220,265 195,074 General corporate expense (35,310) (26,578) $184,955 $168,496 (1) Merger and acquisition costs include investment banking, legal, accounting and other direct costs of $8.2 million related to our pending merger with Fidelity National Information Services, Inc. and $2.9 million related to the possible formation and acquisition of a majority ownership in a card and merchant processing joint venture in Brazil. CERTEGY INC. 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 4th Qtr Year Card Issuer Services $128,727 $135,559 $137,253 $141,182 $542,721 Check Services 108,502 111,923 116,238 128,458 465,121 Merchant Processing 22,756 26,008 27,072 24,509 100,345 Software and Support 2,473 2,533 2,211 1,737 8,954 $262,458 $276,023 $282,774 $295,886 $1,117,141 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 4th Qtr Year Domestic $215,372 $227,631 $233,019 $240,424 $916,446 International 47,086 48,392 49,755 55,462 200,695 $262,458 $276,023 $282,774 $295,886 $1,117,141 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 4th Qtr Year Product and Service Fees $221,290 $230,042 $236,519 $254,027 $941,878 Interchange Fees 19,678 22,787 23,470 21,134 87,069 Reimbursable Expenses 21,490 23,194 22,785 20,725 88,194 $262,458 $276,023 $282,774 $295,886 $1,117,141 4. Currency translation increased (decreased) revenues and operating income for the three months and twelve months ended December 31, 2005 as compared with the prior year as follows (in thousands): Revenues 1st Qtr 2nd Qtr 3rd Qtr 4th Qtr Year Card Services $925 $2,215 $2,536 $1,565 $7,241 Check Services 557 504 (307) (1,580) (826) $1,482 $2,719 $2,229 $(15) $6,415 Operating Income 1st Qtr 2nd Qtr 3rd Qtr 4th Qtr Year Card Services $(217) $(395) $(388) $(577) $(1,577) Check Services 64 116 (64) (654) (538) $(153) $(279) $(452) $(1,231) $(2,115) 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 4th Qtr Year Domestic $10,702 $11,927 $12,250 $14,596 $49,475 International 840 870 853 974 3,537 $11,542 $12,797 $13,103 $15,570 $53,012 Guarantee $6,960 $7,159 $7,484 $9,297 $30,900 Verification 4,582 5,638 5,619 6,273 22,112 $11,542 $12,797 $13,103 $15,570 $53,012 CERTEGY INC. SUPPLEMENTAL INFORMATION, CONTINUED (Unaudited) 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 4th Qtr Cards: Domestic 24,239 24,692 25,052 25,517 International 26,076 26,422 27,344 28,453 50,315 51,114 52,396 53,970 Accounts: Domestic 17,314 17,637 17,894 18,341 International 22,739 22,992 23,526 24,985 40,053 40,629 41,420 43,326 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 4th Qtr Year Dollars (in millions) $1,013 $1,151 $1,195 $1,079 $4,438 Number of Transactions (in thousands) 10,500 12,072 12,287 11,609 46,468 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 4th Qtr Year Card Services $9,025 $9,360 $9,390 $9,774 $37,549 Check Services 3,178 3,213 3,262 3,462 13,115 Corporate 326 311 287 270 1,194 $12,529 $12,884 $12,939 $13,506 $51,858 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 In the third quarter of 2005, Certegy paid $1.0 million for a purchase price adjustment related to a prior acquisition. 2005 1st Qtr 2nd Qtr 3rd Qtr 4th Qtr Year Capital expenditures $12,037 $16,082 $14,764 $20,683 $63,566 Acquisitions, net of cash acquired $- $- $1,000 $- $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 December 31, 2005 and 2004 consists of (in thousands): December 31, 2005 2004 Unsecured notes, 4.75%, due 2008, net of unamortized discount $199,667 $199,543 Borrowings under revolving credit facility - 48,600 Notes payable, variable rate, due 2009 22,364 22,364 Capital lease obligations 5,850 3,461 $227,881 $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 4th Qtr Year Stock option expense $1,520 $1,524 $1,371 $1,434 $5,849 Income tax benefit (415) (430) (371) (850) (2,066) $1,105 $1,094 $1,000 $584 $3,783 Diluted EPS $0.02 $0.02 $0.02 $0.01 $0.06 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 4th Qtr Year Card Services $578 $554 $537 $528 $2,197 Check Services 306 331 272 297 1,206 Corporate 636 639 562 609 2,446 $1,520 $1,524 $1,371 $1,434 $5,849 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. The Company continues to provide transition services to the acquirer of the portion of the business that was sold in June 2005. 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 4th Qtr Year Income from operations $3,260 $2,721 $962 $14 $6,957 Gain on sale - 45,433 - - 45,433 Write-down of portfolio to realizable value - (11,167) - - (11,167) 3,260 36,987 962 14 41,223 Income taxes (1,219) (14,834) (360) (5) (16,418) $2,041 $22,153 $602 $9 $24,805 13. Merger and Acquisition Costs: Merger and acquisition costs for the three months and twelve months ended December 31, 2005 were comprised of the following: 4th Qtr Year Merger Brazil Total Merger Brazil Total Investment banking fees $- $94 $94 $3,864 $406 $4,270 Legal fees 712 514 1,226 2,627 1,025 3,652 Accounting fees 155 47 202 715 440 1,155 Consulting and other costs 782 556 1,338 1,033 1,052 2,085 First Call Analyst: FCMN Contact: 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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