FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2000
-----------------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period ended
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Commission File Number 1-6605
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EQUIFAX INC.
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(Exact name of registrant as specified in its charter)
Georgia 58-0401110
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1550 Peachtree Street, N.W. Atlanta, Georgia 30309
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(Address of principal executive offices) (Zip Code)
404-885-8000
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(Registrant's telephone number, including area code)
None
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(Former name, former address and former fiscal year, if changed
since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
----- -----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at June 30, 2000
----- ----------------------------------
Common Stock, $1.25 Par Value 141,232,680
INDEX
Page No.
--------
Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets --
June 30, 2000 and December 31, 1999 2 - 3
Consolidated Statements of Income --
Three Months Ended June 30, 2000 and 1999 4
Consolidated Statements of Income --
Six Months Ended June 30, 2000 and 1999 5
Consolidated Statement of Shareholders' Equity --
Six Months Ended June 30, 2000 6
Consolidated Statements of Cash Flows --
Six Months Ended June 30, 2000 and 1999 7
Notes to Consolidated Financial Statements 8 - 11
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12 - 15
Item 3. Quantitative and Qualitative Disclosures About Market Risk 15
Part II. Other Information
Item 4. Submission of Matters to a Vote of Security Holders 16
Item 6. Exhibits and Reports on Form 8-K 16
1
PART I. FINANCIAL INFORMATION
------------------------------
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
JUNE 30, DECEMBER 31,
(In thousands) 2000 1999
- --------------------------------------------------------------------------
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 111,736 $ 136,596
Trade accounts receivable, net 336,141 302,809
Other receivables 85,655 87,873
Deferred income tax assets 26,459 28,015
Other current assets 67,755 54,140
---------- ----------
Total current assets 627,746 609,433
---------- ----------
PROPERTY AND EQUIPMENT:
Land, buildings and improvements 36,479 39,140
Data processing equipment and furniture 268,217 258,314
---------- ----------
304,696 297,454
Less accumulated depreciation 194,398 181,964
---------- ----------
110,298 115,490
---------- ----------
GOODWILL 766,905 612,551
---------- ----------
PURCHASED DATA FILES 202,746 157,701
---------- ----------
OTHER ASSETS 370,746 344,606
---------- ----------
$2,078,441 $1,839,781
========== ==========
The notes on pages 8 through 11 are an integral part of these consolidated
balance sheets.
2
CONSOLIDATED BALANCE SHEETS
JUNE 30, DECEMBER 31,
(In thousands, except par value) 2000 1999
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(Unaudited)
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term debt and current maturities of long-term debt $ 76,581 $ 79,866
Accounts payable 154,418 177,427
Accrued salaries and bonuses 33,345 38,203
Income taxes payable 10,055 12,005
Other current liabilities 192,892 197,294
---------- ----------
Total current liabilities 467,291 504,795
---------- ----------
LONG-TERM DEBT, LESS CURRENT MATURITIES 1,158,236 933,708
---------- ----------
LONG-TERM DEFERRED REVENUE 17,280 22,547
---------- ----------
DEFERRED INCOME TAX LIABILITIES 78,435 73,132
---------- ----------
OTHER LONG-TERM LIABILITIES 91,876 89,974
---------- ----------
COMMITMENTS AND CONTINGENCIES (Note 5)
SHAREHOLDERS' EQUITY:
Common stock, $1.25 par value; shares authorized -
300,000; issued - 174,660 in 2000 and 174,259 in 1999;
outstanding - 134,131 in 2000 and 134,001 in 1999 218,325 217,824
Preferred stock, $0.01 par value; shares authorized -
10,000; issued and outstanding - none in 2000 or 1999 -- --
Paid-in capital 310,223 304,532
Retained earnings 796,028 726,827
Accumulated other comprehensive loss (Note 4) (181,913) (161,982)
Treasury stock, at cost, 33,418 shares in 2000
and 34,640 shares in 1999 (786,974) (816,213)
Stock held by employee benefits trusts, at cost,
7,111 shares in 2000 and 5,619 shares in 1999 (90,366) (55,363)
---------- ----------
Total shareholders' equity 265,323 215,625
---------- ----------
$2,078,441 $1,839,781
========== ==========
The notes on pages 8 through 11 are an integral part of these consolidated
balance sheets.
3
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
THREE MONTHS ENDED
JUNE 30,
(In thousands, except per share amounts) 2000 1999
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Operating revenue $498,213 $442,586
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Costs of services 277,002 256,730
Selling, general and administrative expenses 112,245 88,976
-------- --------
Total operating expenses 389,247 345,706
-------- --------
Operating income 108,966 96,880
Other income, net 1,621 8,540
Interest expense (19,856) (15,291)
-------- --------
Income before income taxes 90,731 90,129
Provision for income taxes 37,653 38,023
-------- --------
Net income $ 53,078 $ 52,106
======== ========
Per common share (basic):
Net income $ 0.40 $ 0.38
======== ========
Shares used in computing basic earnings per share 134,089 138,107
======== ========
Per common share (diluted):
Net income $ 0.39 $ 0.37
======== ========
Shares used in computing diluted earnings per share 135,777 140,528
======== ========
Dividends per common share $ 0.0925 $ 0.0900
======== ========
The notes on pages 8 through 11 are an integral part of these consolidated
statements.
4
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
SIX MONTHS ENDED
JUNE 30,
(In thousands, except per share amounts) 2000 1999
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Operating revenue $949,294 $864,090
-------- --------
Costs of services 547,089 505,488
Selling, general and administrative expenses 205,635 172,912
-------- --------
Total operating expenses 752,724 678,400
-------- --------
Operating income 196,570 185,690
Other income, net 2,574 9,022
Interest expense (36,230) (30,426)
-------- --------
Income before income taxes 162,914 164,286
Provision for income taxes 67,609 68,279
-------- --------
Net income $ 95,305 $ 96,007
======== ========
Per common share (basic):
Net income $ 0.71 $ 0.69
======== ========
Shares used in computing basic earnings per share 134,003 138,617
======== ========
Per common share (diluted):
Net income $ 0.70 $ 0.68
======== ========
Shares used in computing diluted earnings per share 135,421 141,086
======== ========
Dividends per common share $ 0.1850 $ 0.1800
======== ========
The notes on pages 8 through 11 are an integral part of these consolidated
statements.
5
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (UNAUDITED)
SIX MONTHS ENDED
(In thousands) JUNE 30, 2000
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COMMON STOCK:
Balance at beginning of period $ 217,824
Shares issued under stock plans 501
---------
Balance at end of period $ 218,325
=========
PAID-IN CAPITAL:
Balance at beginning of period $ 304,532
Shares issued under stock plans 4,297
Dividends from employee benefits trusts 1,394
---------
Balance at end of period $ 310,223
=========
RETAINED EARNINGS:
Balance at beginning of period $ 726,827
Net income 95,305
Cash dividends (26,104)
---------
Balance at end of period $ 796,028
=========
ACCUMULATED OTHER COMPREHENSIVE LOSS (Note 4):
Balance at beginning of period $(161,982)
Adjustment during period (19,931)
---------
Balance at end of period $(181,913)
=========
TREASURY STOCK:
Balance at beginning of period $(816,213)
Cost of shares repurchased (6,517)
Shares issued under stock plans 432
Cost of shares transferred to employee benefits trusts 35,324
---------
Balance at end of period $(786,974)
=========
STOCK HELD BY EMPLOYEE BENEFITS TRUSTS:
Balance at beginning of period $ (55,363)
Cost of shares transferred from treasury stock (35,324)
Cost of shares reissued under stock plans 321
---------
Balance at end of period $ (90,366)
=========
The notes on pages 8 through 11 are an integral part of this consolidated
statement.
6
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
SIX MONTHS ENDED
JUNE 30,
(In thousands) 2000 1999
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 95,305 $ 96,007
Adjustments to reconcile net income to net cash
cash provided by operating activities:
Depreciation and amortization 73,609 59,995
Gain from sale of businesses -- (7,095)
Changes in assets and liabilities:
Accounts receivable, net 1,558 13,430
Current liabilities, excluding debt (33,805) (5,074)
Other current assets (8,923) 157
Deferred income taxes 4,272 3,848
Other long-term liabilities, excluding debt (1,970) (632)
Other assets (14,707) (2,181)
--------- --------
Net cash provided by operating activities 115,339 158,455
--------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment (12,064) (17,917)
Additions to other assets, net (29,530) (39,991)
Acquisitions, net of cash acquired (297,965) (10,934)
Proceeds from sale of businesses -- 25,957
Investments in unconsolidated affiliates (4,748) --
--------- --------
Net cash used in investing activities (344,307) (42,885)
--------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net payments on short-term debt (1,003) (3,434)
Net borrowings on long-term debt 234,627 70,996
Dividends paid (26,104) (26,002)
Treasury stock purchases (6,517) (94,004)
Proceeds from exercise of stock options 4,929 5,140
Other 1,814 1,441
--------- --------
Net cash provided (used) in financing activities 207,746 (45,863)
--------- --------
Effect of foreign currency exchange rates on cash (3,638) (7,981)
--------- --------
Net cash (used) provided (24,860) 61,726
Cash and cash equivalents, beginning of period 136,596 90,617
--------- --------
Cash and cash equivalents, end of period $ 111,736 $152,343
========= ========
The notes on pages 8 through 11 are an integral part of these consolidated
statements.
7
EQUIFAX INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
June 30, 2000
1. BASIS OF PRESENTATION:
The financial statements included herein have been prepared by the Company
pursuant to the rules and regulations of the Securities and Exchange Commission.
This information reflects all adjustments which are, in the opinion of
management, necessary for a fair presentation of the statement of financial
position of the Company as of June 30, 2000, the results of operations for the
three and six months ending June 30, 2000 and 1999, and the cash flows for the
six months ended June 30, 2000 and 1999. All adjustments made have been of a
normal recurring nature. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted. The Company believes that
the disclosures are adequate to make the information presented not misleading.
It is suggested that these financial statements be read in conjunction with the
financial statements and the notes thereto included in the Company's annual
report on Form 10-K for the year ended December 31, 1999.
2. NATURE OF OPERATIONS:
The Company principally provides information services to businesses to help them
grant credit, authorize and process credit card and check transactions, and
market to their customers. The principal lines of business are information
services, payment services, and direct marketing services (see Note 7 for
segment information). The principal markets for all lines of business are
retailers, banks, and other financial institutions, with information services
and direct marketing services also serving the transportation,
telecommunications and utility industries, and direct marketing services also
serving the manufacturing and media industries. The Company's operations are
predominately located within the United States, with foreign operations
principally located within Canada, the United Kingdom and Brazil.
3. USE OF ESTIMATES:
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions.
These estimates and assumptions affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements as well as reported amounts of revenues and expenses
during the reporting period. Actual results could differ from these estimates.
4. SHAREHOLDERS' EQUITY:
Treasury Stock. During the first three months of 2000, the Company repurchased
296,000 of its common shares through open market transactions at an aggregate
cost of $6,517,000. No shares were repurchased during the second quarter. As
of June 30, 2000, approximately $94 million remained authorized for future share
repurchases.
Stock Held by Employee Benefits Trusts. During the first quarter of 2000, the
Company established its third employee benefits trust and transferred 1.5
million treasury shares into that trust. The shares were transferred at the
average cost of shares in treasury and totaled $35,324,000.
8
Comprehensive Income. For the six-month periods ending June 30, 2000 and 1999,
comprehensive income (loss) is as follows:
Six Months Ended
June 30
(in thousands) 2000 1999
- -------------- -------- ---------
Net income $ 95,305 $ 96,007
Change in cumulative foreign
currency translation adjustment (19,931) (125,432)
-------- ---------
Comprehensive income (loss) $ 75,374 $ (29,425)
======== =========
Accumulated other comprehensive loss at June 30, 2000 and December 31, 1999
consists of the following components:
(in thousands) June 30, 2000 December 31, 1999
- -------------- ------------- -----------------
Cumulative foreign currency
translation adjustment $(177,211) $(157,280)
Adjustment for minimum liability
under supplemental retirement plan (4,702) (4,702)
--------- ---------
Accumulated other comprehensive loss $(181,913) $(161,982)
========= =========
5. AGREEMENT WITH COMPUTER SCIENCES CORPORATION:
The Company has an agreement with Computer Sciences Corporation (CSC) under
which CSC-owned credit bureaus and certain CSC affiliate bureaus utilize the
Company's credit database service. CSC and these affiliates retain ownership of
their respective credit files and the revenues generated by their credit
reporting activity. The Company receives a processing fee for maintaining the
database and for each report supplied. The initial term of the agreement
expired in July 1998, and was renewable at the option of CSC for successive ten-
year periods. CSC has renewed the agreement for the ten-year period beginning
August 1, 1998. The agreement provides CSC with an option to sell its credit
reporting businesses to the Company, and provides the Company with an option to
purchase CSC's credit reporting businesses if CSC does not elect to renew the
agreement or if there is a change in control of CSC while the agreement is in
effect. Both options expire in 2013. As of August 1, 1998, the option price is
determined by appraisal.
6. ACQUISITIONS:
During the first six months of 2000, the Company acquired the credit files of
three affiliates located in the United States and ten affiliates in Canada, as
well as a card processing business in Chile. On May 1, 2000, the Company also
acquired the Consumer Information Services group from R.L. Polk & Co. These
acquisitions were accounted for as purchases, had a total purchase price of
$297.9 million, and were acquired for cash. They resulted in $189.7 million of
goodwill, $56.1 million of purchased data files, and $16.0 million of other
assets (primarily software). Their results of operations have been included in
the consolidated statements of income from their respective dates of acquisition
and were not material.
9
7. SEGMENT INFORMATION:
Operating revenue and operating income by segment for the second quarter and
first six months of 2000 and 1999 are as follows (in thousands). The Consumer
Information Services group acquired on May 1, 2000 (Note 6) is included below as
a separate segment.
Second Quarter Six Months
-------------- ----------
Operating Revenue: 2000 1999 2000 1999
- ----------------- -------- -------- -------- --------
North American Information Services $204,790 $196,835 $401,707 $388,827
Payment Services 192,725 163,602 370,109 314,731
Consumer Information Services 24,314 -- 24,314 --
Equifax Europe 44,279 47,220 89,707 93,273
Equifax Latin America 29,696 32,520 58,639 62,441
Other 2,409 2,409 4,818 4,818
-------- -------- -------- --------
$498,213 $442,586 $949,294 $864,090
======== ======== ======== ========
Operating Income (Loss):
- -----------------------
North American Information Services $ 76,407 $ 71,696 $141,510 $137,375
Payment Services 39,087 30,607 65,572 59,244
Consumer Information Services (1,973) -- (1,973) --
Equifax Europe 1,415 (1,289) 2,002 (2,977)
Equifax Latin America 5,505 5,047 10,208 9,234
Other 2,217 2,217 4,434 4,434
-------- -------- -------- --------
Operating Contribution 122,658 108,278 221,753 207,310
General Corporate Expense (13,692) (11,398) (25,183) (21,620)
-------- -------- -------- --------
$108,966 $ 96,880 $196,570 $185,690
======== ======== ======== ========
Total assets by segment at June 30, 2000 and December 31, 1999 are as follows:
June 30, December 31,
(in thousands) 2000 1999
- -------------- ---------- ------------
North American Information Services $ 650,177 $ 612,002
Payment Services 482,327 499,646
Consumer Information Services 269,522 --
Equifax Europe 260,270 297,048
Equifax Latin America 259,395 277,015
Other 3,250 3,951
Corporate 153,500 150,119
---------- ----------
$2,078,441 $1,839,781
========== ==========
The 12% decline in total assets within the Equifax Europe segment was due
primarily to declines in the U.K. and Spain currency exchange rates between
periods and a reduction in cash from the payment of an inter-company debt to
Equifax Inc.
10
8. EARNINGS PER SHARE (EPS):
The income amount used in the numerator of the Company's EPS calculations is the
same for both basic and diluted EPS. A reconciliation of the average
outstanding shares used in the denominator of the calculations is as follows:
Second Quarter Six Months
--------------- ----------
(in thousands) 2000 1999 2000 1999
- -------------- ------- ------- ------- -------
Weighted average shares
outstanding (basic) 134,089 138,107 134,003 138,617
Effect of dilutive securities:
Stock options 1,511 2,141 1,241 2,189
Performance share plan 177 280 177 280
------- ------- ------- -------
Weighted average shares
outstanding (diluted) 135,777 140,528 135,421 141,086
======= ======= ======= =======
9. RECENT ACCOUNTING PRONOUNCEMENT:
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 (SFAS 133), "Accounting for Derivative
Instruments and Hedging Activities." SFAS 133 establishes accounting and
reporting standards for derivative instruments and hedging activities, and is
effective (as amended by SFAS No. 137) on January 1, 2001 for the Company.
Based on its current level of derivative instruments and hedging activities, the
Company does not believe the adoption of SFAS 133 will have a significant impact
on its financial statements or reported earnings.
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Results of Operations - (second quarter and first six months of 2000 compared to
the second quarter and first six months of 1999)
Revenue for the second quarter and first six months of 2000 increased 12.6% and
9.9% respectively over the prior year. Excluding the impacts of acquisitions
and divestitures, revenue increased 6.4% in the second quarter and 6.5% year to
date, with foreign currency exchange rates negatively impacting revenue by about
1.4% in the quarter and 0.9% in the first six months. These increases were
driven by higher revenue in credit marketing services in the North American
segment and higher revenues in U.S. Check Solutions and U.S. Card Solutions in
the Payment Services segment. Operating income of $109.0 million for the
quarter and $196.6 million for the first six months increased 12.5% and 5.9%
respectively over the prior year periods. The operating income improvements
were driven by the revenue increases in the North American and Payment Services
segments, along with continued costs control efforts in Equifax Europe.
Net income increased $1.0 million in the second quarter and declined $0.7
million in the first six months, while diluted earning per share increased $0.02
in each period. In May 2000, the Company acquired R.L. Polk & Co.'s consumer
information services businesses (Note 6). The dilution from this acquisition
totaled $0.02 per share in the second quarter. In the second quarter of 1999,
the Company sold its 34% interest in Proceda in Brazil and also sold three Risk
Management offices in the U.S. The resulting gain of $7.1 million was reported
in other income, net ($2.9 million after tax, or $0.02 per share). Excluding
the impacts of the 2000 Polk businesses acquisition and the 1999 gain from sale
of businesses, earnings per share increased 17% in the second quarter and 9% in
the first six months. Average outstanding diluted shares declined 3.4% in the
quarter and 4.0% for the first six months, primarily the result of 1999 share
repurchases.
The following discussion analyzes operating results for the Company's reportable
segments, general corporate expense, and consolidated other income and interest
expense.
North American Information Services
- -----------------------------------
Revenue in North American Information Services, which includes U.S. Credit
Information and Marketing Services, U.S. Risk Management Services, Mortgage
Information Services, Canadian Operations, and three emerging businesses
(Knowledge Engineering/TM/, Consumer Direct, and Equifax Secure) increased 4.0%
in the second quarter and 3.3% in the first six months. Growth in both periods
was tempered by lower revenue within U.S. Risk Management Services and Mortgage
Services. Acquisitions and divestitures had only a minimal impact on this
segment's revenue growth in the quarter.
U.S. Credit Information and Marketing Services revenue was up 8.3% in the second
quarter and 7.2% in the first six months. These increases were driven by growth
in marketing services due primarily to higher volume from financial services and
telecommunication industry customers. Within credit information services, unit
volumes increased approximately 10.5% in both periods, while average prices
declined about 9% in the quarter and 8% in the first six months. The decline in
average prices in both periods resulted from a change in the mix of customer
business, as the majority of unit growth was generated by large volume customers
at lower than average unit prices.
Revenue in U.S. Risk Management Services was down 4.5% in the quarter and 8.8%
year to date. After adjusting for the June 1999 sale of three non-strategic
offices, revenue was up slightly in the quarter and down about 4% year to date.
Mortgage Information Services revenue declined 25.9% in the quarter and 25.2%
year to date largely due to higher interest rates, which adversely impacted
refinancing activity. Canadian revenues were up 0.5% (1.0% in local currency)
in the quarter and 3.0% (1.3% in local currency) year to date.
12
Emerging business revenue increased $0.9 million in the quarter and $3.0 million
year to date, with the majority of the growth in both periods coming from the
Internet related activities of Consumer Direct and Equifax Secure.
Operating income for North American Information Services was up 6.6% in the
quarter and 3.0% in the first six months, with growth in both periods tempered
by increased losses in emerging businesses. These losses included developmental
expenses within Equifax Secure related to remote authentication and digital
certificate services, as well as increased investments in Knowledge Engineering
and Consumer Direct. Absent these three emerging businesses, this segment's
operating income increased 9.2% in the quarter and 8.0% in the first six months,
driven by quarterly and year-to-date increases in profit from U.S. Credit
Information and Marketing of 12.0% and 11.1%, respectively. These increases were
partially offset by lower operating income from Mortgage Services in both
periods due to the revenue declines in this business.
Payment Services
- ----------------
Revenue in Payment Services, which consists of Card Solutions, Check Solutions
and Card Software, increased 17.8% in the second quarter and 17.6% in the first
six months. In January 2000, Payment Services expanded its operations in Latin
America by acquiring a card processing business in Chile. Exclusive of this
acquisition, this segment's revenue was up 16.7% in the quarter and 16.6% year
to date, with the June 1999 start-up of a card processing operation in the U.K.
accounting for 2.6 percentage points of the quarterly increase and 3.3
percentage points of the year-to-date increase.
Excluding the effects of the acquisition in Chile, revenue within Card Solutions
increased 18.9% in the quarter and 23.2% in the first six months, with 4.1
percentage points and 5.4 percentage points of the respective increases
attributable to the card processing operation in the U.K. The remaining growth
was driven by higher revenue within the U.S. card business, which increased
14.7% in the quarter and 17.9% year to date due to growth in processing of both
merchant and cardholder transactions. Revenue from the Brazilian card
processing operation was up 15.9% (21.8% in local currency) in the quarter and
18.1% (22.8% in local currency) year to date due to growth in the cardholder
account base.
Revenue in Check Solutions was up 11.5% in the quarter and 13.3% in the first
six months, driven by quarterly and year-to-date increases of 13.3% and 15.5%,
respectively, in revenue from the U.S. check business. The increase in U.S.
check revenue was due to volume growth, with approximately one half of the
increase in both periods due to new business from Sears, Roebuck and Co.
resulting from a 1999 agreement to provide check authorization services at the
retailer's U.S. locations. This contract will become comparable on a year-to-
year basis in the last half of 2000. Second quarter revenue from the U.K. check
business was up 4.3% (9.3% in local currency), while revenue from Canadian
operations increased 8.7% (9.3% in local currency). For the first six months,
revenue from the U.K. check business was up 4.7% (8.1% in local currency), while
revenue from Canadian operations increased 12.8% (11.0% in local currency).
Revenue in Card Software was up $1.9 million in the quarter and down $6.2
million year to date. The increase in the second quarter revenue was due to an
increase in license sales partially offset by lower consulting revenues. The
year-to-date decline was driven by a decrease in license sales and lower
consulting revenues. The Company is de-emphasizing card software license sales
as it grows its global card processing operations which will utilize this
proprietary software to generate a recurring revenue stream. However, license
sales are likely to continue to occur from time to time, as circumstances arise.
The decline in consulting revenues is resulting from applying these resources to
the establishment of the Company's global card processing operation in the U.K.
and Australia.
Payment Services operating income increased 27.7% in the quarter and 10.7% in
the first six months, driven by profit increases from the U.S. card operations
and from Check Solutions. Operating income from the U.S. card operations
increased 20.7% in the quarter and 17.7% in the six month period, while profit
from Check Solutions was up 19.6% in the quarter and 30.1% year to date. These
increases resulted from the revenue growth as well as continued cost management.
This segment's operating income was adversely affected by increased operating
losses of $1.2 million in the quarter and $3.0 million for the six month period
attributable to international card operations, substantially related to
13
start-up costs associated with the U.K. card operation.
Consumer Information Services
- -----------------------------
This segment consists of the businesses acquired from R.L. Polk & Co. on May 1,
2000, and includes direct marketing, data information, and city directory
services. During the two months of Equifax ownership in the second quarter,
revenues totaled $24.3 million, with an operating loss of $2.0 million. The
operating loss resulted from seasonality in the city directory business. This
segment is expected to generate positive operating income for the remainder of
the year.
Equifax Europe
- --------------
Equifax Europe consists of operations primarily in the United Kingdom and Spain.
Second quarter and first six months revenue declined 6.2% and 3.8% respectively
from the prior year periods. Excluding the impact of exchange rate declines in
the U.K. and Spain (approximately $2.9 million for the second quarter and $4.6
million year-to-date), revenue was virtually flat in the second quarter and
increased 1.1% for the first six months. Improvements in U.K. consumer
information services and Spain were partially offset by lower U.K. auto lien and
risk management revenue. The decline in auto lien services resulted from both
increased competition within that market and a slowdown in used car financing.
This segment reported operating income of $1.4 million in the second quarter and
$2.0 million for the first six months. These results are improvements of $2.7
million and $5.0 million from the respective prior year periods, and reflect a
stabilization of this segment's revenue in conjunction with continuing cost
management. The second quarter operating income marks the fourth consecutive
quarter of profitable results in this segment, and profit dollars and profit
margins are expected to continue to improve.
Equifax Latin America
- ---------------------
Equifax Latin America consists of information companies in Brazil, Chile and
Argentina, and majority interests in information companies in Peru and El
Salvador. This segment's second quarter and first six months revenue declined
$2.8 million and $3.8 million respectively from the prior year, with about $1.2
million and $2.0 million of the declines attributable to exchange rate declines
in Brazil and Chile. In local currency, Brazil revenue increased 1.5% in the
quarter and 4.4% year-to-date, while revenue in Chile and Argentina continued to
be negatively impacted by weaknesses in their economies. Operations in Mexico
were shut down during the first quarter due to the poor outlook for future
returns. The shut down had only a minimal financial impact in the first
quarter.
This segment's operating income increased 9.1% in the second quarter and 10.5%
year-to-date, as higher income from Brazil (due to both revenue gains and cost
controls) and lower losses from Mexico (resulting from its first quarter 2000
shutdown) were partially offset by lower income in Argentina and Chile due to
their declines in revenue.
Other
- -----
This segment's revenue and operating income remained comparable between periods.
Its operations consist solely of a subcontract expiring in 2002 related to HISI,
the Company's lottery subsidiary.
General Corporate Expense
- -------------------------
General corporate expense increased $2.3 million in the second quarter and $3.6
million in the first six months versus the prior year. The second quarter
increase was due primarily to higher performance share and administrative
expenses, while the year-to-date increase resulted primarily from higher
administrative, marketing and technology expenses.
14
Other Income and Interest Expense
- ---------------------------------
Other income declined $6.9 million in the second quarter and $6.4 million in the
first six months versus the prior year. These declines resulted from a $7.1
million gain recorded in other income in the second quarter of 1999 related to
the sales of Proceda in Brazil and three non-strategic Risk Management offices
in the U.S. The impact of the 1999 gain was partially offset by higher levels of
interest income on invested funds in both the second quarter and first six
months of 2000 (primarily in foreign countries). Interest expense increased $4.6
million in the quarter and $5.8 million year-to-date due to the higher level of
borrowing associated with 1999 share repurchases and 2000 acquisitions.
FINANCIAL CONDITION
Net cash provided by operations for the first six months of 2000 totaled $115.3
million. Dividend payments and capital expenditures, exclusive of acquisitions,
were met with these internally generated funds. Other significant outlays in
the first six months of 2000 included $6.5 million of treasury stock purchases
(Note 4) and $302.7 million for acquisitions (Note 6) and investments in
unconsolidated affiliates. These items were principally financed by $234.6
million in net borrowings of long-term debt, excess cash from operations, and
the use of existing cash reserves.
Capital expenditures for 2000 are currently estimated to be approximately $120
million, with $41.6 million spent in the first six months. Additional
expenditures may occur as opportunities arise. The remaining 2000 capital
expenditures, exclusive of acquisitions, are expected to be met with internally
generated funds. At June 30, 2000, approximately $94 million remained
authorized under the Company's share repurchase program.
At June 30, 2000, $193 million remained available under the Company's $750
million revolving credit facility to fund future capital requirements. Should
CSC exercise its option to sell its credit reporting business to the Company
(Note 5), additional sources of financing would be required. However, the CSC
agreement calls for a six-month notice period, and management believes the
Company would have alternative sources of liquidity available to fund this
potential purchase through the public debt markets and bank lines of credit.
Management believes that the Company's liquidity will remain strong in both the
short and long term, and that the Company has sufficient sources of external
funding to finance all of its capital needs, if necessary.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risk, primarily from changes in foreign
currency exchange rates and interest rates.
In the normal course of business, the balance sheets and results of operations
of foreign subsidiaries can be impacted by changes in exchange rates. The
Company's position is to not hedge against this risk due to the significant cost
involved. At June 30, 2000, the Company had no material intercompany balances
with foreign affiliates that were short-term in nature or material obligations
in a foreign currency, other than intercompany advances to its U.K. operations.
From time to time, as such balances or obligations arise, the Company may
consider hedging to minimize its exposure for these transactions. At June 30,
2000, the exchange risk associated with the Company's intercompany advances to
its U.K. operations were effectively hedged by having a similar balance of pound
sterling borrowed under its revolving credit facility.
The Company chooses to have a mix of fixed-rate and variable-rate debt in its
portfolio of debt obligations. Accordingly, the Company's earnings can be
affected by the impact that changes in interest rates have on its variable-rate
obligations. At June 30, 2000, approximately $624 million (51%) of the
Company's short-term and long-term debt was in variable-rate facilities. At
this level, if market interest rates increased 1%, interest expense would
increase approximately $6.2 million per year (pre-tax). To lower this risk, in
July 2000 the Company entered into a six-month interest rate swap arrangement to
fix the interest rate for $200 million of its variable rate revolver debt.
Forward-looking Statements
- --------------------------
Statements in this report that relate to Equifax's future plans, objectives,
expectations, performance, events and the like are "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995 and
the Securities Exchange Act of 1934. Future events, risks and uncertainties,
individually or in the aggregate, could cause actual results to differ
materially from those expressed or implied in these statements. Those factors
could include changes in worldwide and U.S. economic conditions that materially
impact consumer spending and consumer debt, changes in demand for the Company's
products and services, risks associated with the integration of acquisitions and
other investments, and other factors discussed in the "Forward-looking
Information" and "Year 2000 Information" sections in the management's discussion
and analysis included at Part II, Item 7 in the Company's annual report on Form
10-K for the year ended December 31, 1999.
15
PART II. OTHER INFORMATION
---------------------------
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) On April 27, 2000, the Company held its regular annual meeting of
Shareholders.
(b) Below is a brief description of each matter voted upon at the
annual meeting, each more fully described in the Company's
definitive Proxy Statement, dated March 24, 2000:
(i) Election of four directors to serve terms of three years:
Lee A. Kennedy (113,669,916 votes "for" and 3,302,173 votes
withheld); Larry L. Prince (108,483,787 votes "for" and
8,488,302 votes withheld); Louis W. Sullivan, M.D.
(115,013,517 votes "for" and 1,958,572 votes withheld);
Jacquelyn M. Ward (114,972,282 votes "for" and 1,999,807
votes withheld). The names of other Directors whose term of
office as a Director continued after this meeting are as
follows: Lee A. Ault, III, Thomas F. Chapman, John L.
Clendenin, A. William Dahlberg, Robert P. Forrestal, L.
Phillip Humann, D. Raymond Riddle and Betty L. Siegel,
Ph.D.
(ii) Approval of Appointment of Arthur Andersen as independent
public accountants of the Company for the year 2000
(115,747,165 votes "for"; 494,842 votes "against"; and
730,316 abstentions).
(iii) Approval of the Equifax Inc. 2000 Stock Incentive Plan
(89,058,811 votes "for"; 10,294,998 votes "against";
1,098,996 abstentions and 16,519,518 broker non-votes).
(iv) Approval of the Equifax Inc. Key Management Long-Term
Incentive Plan (103,771,082 votes "for"; 11,834,775 votes
"against"; and 1,364,866 abstentions).
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
A list of exhibits included as part of this report is set forth in
the Exhibit Index appearing elsewhere in this report, and is
incorporated by reference.
(b) Reports on Form 8-K
Registrant did not file any reports on Form 8-K during the quarter
for which this report is filed.
16
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned duly authorized officers.
EQUIFAX INC.
------------
(Registrant)
/s/ Thomas F. Chapman
Date: August 10, 2000 -----------------------------------
Thomas F. Chapman, Chairman
and Chief Executive Officer
/s/ Philip J. Mazzilli
Date: August 10, 2000 -----------------------------------
Philip J. Mazzilli
Executive Vice President and
Chief Financial Officer
17
EXHIBIT INDEX
-------------
Exhibit Number Description of Exhibit
- -------------- ----------------------
27 Financial Data Schedule, submitted to the Securities and
Exchange Commission in electronic format