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, 2001
--------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period ended _________________________
Commission File Number 1-6605
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EQUIFAX INC.
- --------------------------------------------------------------------------------
(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, 2001
----- ----------------------------
Common Stock, $1.25 Par Value 143,909,477
INDEX
Page No.
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Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets --
June 30, 2001 and December 31, 2000 2 - 3
Consolidated Statements of Income --
Three Months Ended June 30, 2001 and 2000 4
Consolidated Statements of Income --
Six Months Ended June 30, 2001 and 2000 5
Consolidated Statement of Shareholders'
Equity -- Six Months Ended June 30, 2001 6
Consolidated Statements of Cash Flows --
Six Months Ended June 30, 2001 and 2000 7
Notes to Consolidated Financial Statements 8 - 12
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 13 - 15
Item 3. Quantitative and Qualitative Disclosures About Market Risk 15 - 16
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K 17
1
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
JUNE 30, DECEMBER 31,
(In thousands) 2001 2000
- --------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 35,339 $ 59,619
Trade accounts receivable, net 227,537 225,972
Other receivables 70,597 66,155
Deferred income tax assets 24,743 18,409
Other current assets 31,718 33,581
---------- ----------
Total current assets 389,934 403,736
---------- ----------
PROPERTY AND EQUIPMENT:
Land, buildings and improvements 31,347 30,974
Data processing equipment and furniture 148,865 150,541
---------- ----------
180,212 181,515
Less accumulated depreciation 121,101 115,510
---------- ----------
59,111 66,005
---------- ----------
GOODWILL 536,631 556,994
---------- ----------
PURCHASED DATA FILES 210,998 209,379
---------- ----------
OTHER ASSETS 330,868 329,112
---------- ----------
NET ASSETS OF DISCONTINUED OPERATIONS 493,676 385,137
---------- ----------
$2,021,218 $1,950,363
========== ==========
The notes on pages 8 through 12 are an integral part of these consolidated
balance sheets.
2
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
JUNE 30, DECEMBER 31,
(In thousands, except par values) 2001 2000
- ---------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term debt and current maturities of long-term debt $ 103,374 $ 54,202
Accounts payable 20,404 16,797
Accrued salaries and bonuses 18,945 24,510
Income taxes payable 2,570 16,373
Other current liabilities 179,039 155,227
----------- -----------
Total current liabilities 324,332 267,109
----------- -----------
LONG-TERM DEBT, LESS CURRENT MATURITIES 981,557 993,427
----------- -----------
LONG-TERM DEFERRED REVENUE 24,011 32,864
----------- -----------
DEFERRED INCOME TAX LIABILITIES 85,072 80,079
----------- -----------
OTHER LONG-TERM LIABILITIES 123,398 136,018
----------- -----------
COMMITMENTS AND CONTINGENCIES (Note 6)
SHAREHOLDERS' EQUITY:
Common stock, $1.25 par value; shares authorized -
300,000; issued - 177,271 in 2001 and 175,991 in 2000;
outstanding - 137,141 in 2001 and 135,835 in 2000 221,588 219,989
Preferred stock, $0.01 par value; shares authorized -
10,000; issued and outstanding - none in 2001 or 2000 -- --
Paid-in capital 358,501 336,527
Retained earnings 953,554 902,475
Accumulated other comprehensive loss (Note 5) (182,119) (148,875)
Treasury stock, at cost, 33,055 shares in 2001
and 33,078 shares in 2000 (778,429) (778,955)
Stock held by employee benefits trusts, at cost,
7,074 shares in 2001 and 7,079 shares in 2000 (90,247) (90,295)
----------- -----------
Total shareholders' equity 482,848 440,866
----------- -----------
$ 2,021,218 $ 1,950,363
=========== ===========
The notes on pages 8 through 12 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) 2001 2000
- -------------------------------------------------------------------------------------
Operating revenue $ 289,546 $ 305,540
--------- ---------
Costs of services 124,490 144,860
Selling, general and administrative expenses 88,818 89,286
--------- ---------
Total operating expenses 213,308 234,146
--------- ---------
Operating income 76,238 71,394
Other income, net 1,270 1,768
Interest expense (11,763) (15,131)
--------- ---------
Income from continuing operations
before income taxes and minority interests 65,745 58,031
Provision for income taxes 26,833 24,552
Minority interests in earnings, net of tax (615) (1,484)
--------- ---------
Income from continuing operations 38,297 31,995
--------- ---------
Discontinued operations (Note 3):
Income from discontinued operations, net of income
taxes of $12,593 in 2001 and $13,101 in 2000 19,625 21,083
Costs associated with effecting the spin-off, net of
income tax benefit of $8,076 (28,424) --
--------- ---------
Total discontinued operations (8,799) 21,083
--------- ---------
Net income $ 29,498 $ 53,078
========= =========
Per common share (basic):
Income from continuing operations $ 0.28 $ 0.24
Discontinued operations (0.06) 0.16
--------- ---------
Net income $ 0.22 $ 0.40
========= =========
Shares used in computing basic earnings per share 136,535 134,089
========= =========
Per common share (diluted):
Income from continuing operations $ 0.28 $ 0.24
Discontinued operations (0.06) 0.16
--------- ---------
Net income $ 0.21 $ 0.39
========= =========
Shares used in computing diluted earnings per share 138,415 135,777
========= =========
Dividends per common share $ 0.0925 $ 0.0925
========= =========
The notes on pages 8 through 12 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) 2001 2000
- ---------------------------------------------------------------------------------------------
Operating revenue $ 574,754 $ 579,364
--------- ---------
Costs of services 251,003 284,551
Selling, general and administrative expenses 177,241 160,912
--------- ---------
Total operating expenses 428,244 445,463
--------- ---------
Operating income 146,510 133,901
Other income, net 2,877 2,807
Interest expense (24,689) (26,804)
--------- ---------
Income from continuing operations
before income taxes and minority interests 124,698 109,904
Provision for income taxes 50,737 46,476
Minority interests in earnings, net of tax (1,549) (2,863)
--------- ---------
Income from continuing operations 72,412 60,565
--------- ---------
Discontinued operations (Note 3):
Income from discontinued operations, net of income
taxes of $21,431 in 2001 and $21,133 in 2000 33,612 34,740
Costs associated with effecting the spin-off, net of
income tax benefit of $8,076 (28,424) --
--------- ---------
Total discontinued operations 5,188 34,740
--------- ---------
Net income $ 77,600 $ 95,305
========= =========
Per common share (basic):
Income from continuing operations $ 0.53 $ 0.45
Discontinued operations 0.04 0.26
--------- ---------
Net income $ 0.57 $ 0.71
========= =========
Shares used in computing basic earnings per share 136,271 134,003
========= =========
Per common share (diluted):
Income from continuing operations $ 0.52 $ 0.45
Discontinued operations 0.04 0.26
--------- ---------
Net income $ 0.56 $ 0.70
========= =========
Shares used in computing diluted earnings per share 138,006 135,421
========= =========
Dividends per common share $ 0.1850 $ 0.1850
========= =========
The notes on pages 8 through 12 are an integral part of these consolidated
statements.
5
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (UNAUDITED)
SIX MONTHS ENDED
(In thousands) JUNE 30, 2001
- -----------------------------------------------------------------------
COMMON STOCK:
Balance at beginning of period $ 219,989
Shares issued under stock plans 1,599
---------
Balance at end of period $ 221,588
=========
PAID-IN CAPITAL:
Balance at beginning of period $ 336,527
Shares issued under stock plans 20,210
Other 1,764
---------
Balance at end of period $ 358,501
=========
RETAINED EARNINGS:
Balance at beginning of period $ 902,475
Net income 77,600
Cash dividends (26,521)
---------
Balance at end of period $ 953,554
=========
ACCUMULATED OTHER COMPREHENSIVE LOSS (Note 5):
Balance at beginning of period $(148,875)
Adjustments during period (33,244)
---------
Balance at end of period $(182,119)
=========
TREASURY STOCK:
Balance at beginning of period $(778,955)
Shares issued under stock plans 526
---------
Balance at end of period $(778,429)
=========
STOCK HELD BY EMPLOYEE BENEFITS TRUSTS:
Balance at beginning of period $ (90,295)
Shares issued under stock plans 48
---------
Balance at end of period $ (90,247)
=========
The notes on pages 8 through 12 are an integral part of this consolidated
statement.
6
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) SIX MONTHS ENDED
JUNE 30,
(In thousands) 2001 2000
- -------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 77,600 $ 95,305
Exclude discontinued operations:
Income from discontinued operations (33,612) (34,740)
Costs associated with effecting the spinoff 28,424 --
--------- ---------
Income from continuing operations 72,412 60,565
Adjustments to reconcile income from continuing operations to
net cash provided by operating activities of continuing operations:
cash provided by operating activities:
Depreciation and amortization 52,969 52,014
Changes in assets and liabilities:
Accounts receivable, net (1,405) (15,918)
Current liabilities, excluding debt (21,012) (12,770)
Other current assets 1,005 (9,463)
Deferred income taxes 5,243 4,271
Other long-term liabilities, excluding debt (5,803) (5,586)
Other assets (9,132) (12,972)
--------- ---------
Net cash provided by operating activities of continuing operations 94,277 60,141
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment (5,067) (6,085)
Additions to other assets, net (22,199) (17,949)
Acquisitions, net of cash acquired (31,939) (285,463)
Investments in unconsolidated affiliates (5,000) (4,748)
Deferred payments on prior year acquisitions (3,097) (1,840)
--------- ---------
Net cash used in investing activities of continuing operations (67,302) (316,085)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net additions (payments) on short-term debt 47,789 (1,003)
Net additions (payments) on long-term debt (6,570) 235,033
Dividends paid (26,521) (26,104)
Treasury stock purchases -- (6,517)
Proceeds from exercise of stock options 16,058 4,929
Other 1,700 1,813
--------- ---------
Net cash provided by financing activities of continuing operations 32,456 208,151
--------- ---------
Effect of foreign currency exchange rates on cash (1,756) (2,121)
Net cash provided by (used in) discontinued operations (81,955) 29,263
--------- ---------
Net cash used (24,280) (20,651)
Cash and cash equivalents, beginning of period 59,619 102,979
--------- ---------
Cash and cash equivalents, end of period $ 35,339 $ 82,328
========= =========
The notes on pages 8 through 12 are an integral part of these consolidated
statements.
7
EQUIFAX INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
June 30, 2001
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, 2001, and the results of operations for
the three and six month periods ending June 30, 2001 and 2000 and the cash flows
for the six month periods ending June 30, 2001 and 2000. 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,
2000.
2. NATURE OF OPERATIONS:
The Company principally provides information services to businesses to help them
grant credit and market to their customers (see Note 8 for segment information).
The Company's principal markets include retailers, banks and other financial
institutions, the transportation, telecommunication, utility, and manufacturing
industries, as well as consumers and government. The Company's operations are
predominantly located within the United States, with foreign operations
principally located within Canada, the United Kingdom, and Brazil.
3. DISCONTINUED OPERATIONS AND SPIN-OFF:
On October 2, 2000, the Company announced its intention to split into two
independent, publicly traded companies by spinning off its Payment Services
industry segment (Certegy Inc. or Certegy) through a dividend of all of its
Certegy stock to Equifax shareholders. In April 2001, the IRS issued a positive
ruling related to the tax-free nature of the dividend for U.S. federal income
tax purposes. On June 11, 2001, the transaction was approved by the Company's
Board of Directors, and on July 7, 2001 the spin-off was completed, with Equifax
shareholders receiving one share of Certegy stock for each two shares of Equifax
stock owned.
As a result of the July 2001 spin-off, the Company's June 30, 2001 financial
statements have been prepared with Certegy's net assets, results of operations,
and cash flows isolated and shown as "discontinued operations". All historical
statements have been restated to conform with this presentation. Also as a
result of the spin-off, during the second quarter of 2001 the Company recorded
an expense of $36.5 million ($28.4 million after tax, or $0.21 per share) to
accrue the costs associated with effecting the spin-off. These costs include
fees for investment bankers, legal and accounting services, duplicate software
licenses, and various other directly related expenses. This expense has been
included as a component of discontinued operations in the accompanying
statements of income and cash flows.
8
Summarized financial information for discontinued operations is as follows:
Three Months Ended Six Months Ended
June 30 June 30
----------------------- ----------------------
(In thousands) 2001 2000 2001 2000
- -------------- ----------------------- -------- --------
Revenue $203,739 $192,673 $398,273 $369,930
Income before income taxes and
minority interest expense 32,545 33,713 55,988 54,886
Net income 19,625 21,083 33,612 34,740
June 30, December 31,
(In thousands) 2001 2000
- ------------- --------- ------------
Current assets $243,043 $201,173
Total assets 594,365 504,411
Current liabilities 162,336 159,115
Total liabilities 176,872 176,562
Cumulative translation adjustment (76,183) (57,288)
Net assets of discontinued operations 493,676 385,137
4. USE OF ESTIMATES:
The preparation of financial statements in conformity with accounting principles
generally accepted in the U.S. 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.
5. SHAREHOLDERS' EQUITY:
Treasury Stock. No shares were repurchased during the first six months of 2001,
and as of June 30, 2001, 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.
Comprehensive Income. Comprehensive income for the six-month periods ending
June 30, 2001 and 2000 is as follows:
Six Months Ended
June 30
-----------------------------
(In thousands) 2001 2000
- -------------------------------------------- ----------- ---------
Net income $ 77,600 $ 95,305
Change in cumulative foreign
currency translation adjustment (32,876) (17,019)
Change in cumulative loss from
cash flow hedging transactions (Note 10) (368) --
-------- --------
Comprehensive income $ 44,356 $ 78,286
======== ========
9
Accumulated other comprehensive loss at June 30, 2001 and December 31, 2000
consists of the following components:
June 30, December 31,
(In thousands) 2001 2000
- --------------------------------------------- ---------- -----------
Cumulative foreign currency
translation adjustment $(178,417) $(145,541)
Cumulative loss from cash flow
hedging transactions (Note 10) (368) --
Adjustment for minimum liability
under supplemental retirement plan (3,334) (3,334)
--------- ---------
Accumulated other comprehensive loss $(182,119) $(148,875)
========= =========
6. AGREEMENT WITH COMPUTER SCIENCES CORPORATION:
The Company has an agreement with Computer Sciences Corporation and certain of
its affiliated credit reporting agencies (CSC) under which CSC-owned credit
reporting agencies utilize the Company's computerized credit database services.
CSC retains ownership of its credit files and the revenues generated by its
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. The option price is determined by
appraisal.
7. ACQUISITIONS:
During the first six months of 2001, the Company acquired the credit files of
three affiliated credit reporting agencies located in the United States and six
agencies in Canada, as well as an information services business in Uruguay.
These acquisitions were accounted for as purchases, had a total purchase price
of $32.2 million, and were acquired for cash. They resulted in $15.4 million of
goodwill and $16.3 million of purchased data files. Their results of operations
have been included in the consolidated statements of income from their
respective dates of acquisition and were not material.
8. SEGMENT INFORMATION:
Beginning in the first quarter of 2001, the Company reclassified its minority
interest expense in the net income of subsidiaries that are consolidated but not
fully owned. This expense was previously included in operating income and is
now shown separately on the income statement. The Company has also reclassified
a small check collections business from Equifax Europe to Check Solutions, which
is now included with discontinued operations.
10
Operating revenue and operating income from continuing operations by segment for
the second quarter and first six months of 2001 and 2000 (restated for the items
discussed above) are as follows:
Second Quarter Six Months
---------------------- ---------------------
(In thousands) 2001 2000 2001 2000
- ---------------------------------------- -------- -------- ------- --------
Operating Revenue:
- ----------------------------------------
North American Information Services $192,915 $170,470 $374,840 $334,064
Consumer Information Services 31,699 24,314 69,607 24,314
Equifax Europe 35,434 35,819 71,218 71,805
Equifax Latin America 27,089 29,696 54,271 58,639
Other 2,409 2,409 4,818 4,818
-------- -------- ------- --------
289,546 262,708 $574,754 493,640
Divested Operations -- 42,832 -- 85,724
-------- -------- -------- --------
$289,546 $305,540 $574,754 $579,364
======== ======== ======== ========
Operating Income (Loss):
- ----------------------------------------
North American Information Services $ 79,586 $ 70,567 $151,746 $130,615
Consumer Information Services (580) (1,973) 3,144 (1,973)
Equifax Europe 520 2,732 116 3,701
Equifax Latin America 6,598 6,987 11,934 13,001
Other 2,217 2,217 4,434 4,434
General Corporate Expense (12,103) (13,694) (24,864) (25,184)
-------- -------- -------- --------
76,238 66,836 $146,510 124,594
Divested Operations -- 4,558 -- 9,307
-------- -------- -------- --------
$ 76,238 $ 71,394 $146,510 $133,901
======== ======== ======== ========
Total assets from continuing operations by segment at June 30, 2001 and December
31, 2000 are as follows:
June 30, December 31,
(In thousands) 2001 2000
- -------------------------------------- ----------- ------------
North American Information Services $ 611,913 $ 607,421
Consumer Information Services 261,568 264,759
Equifax Europe 206,980 224,977
Equifax Latin America 215,618 251,628
Corporate 226,816 213,493
Other 4,647 2,948
---------- ----------
$1,527,542 $1,565,226
========== ==========
Asset declines in Europe and Latin America result primarily from declines in the
foreign currency exchange rates of the countries that comprise those segments.
11
9. 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) 2001 2000 2001 2000
- ------------------------------------ ------- ------- ------- -------
Weighted average shares
outstanding (basic) 136,535 134,089 136,271 134,003
Effect of dilutive securities:
Stock options 1,791 1,511 1,646 1,241
Performance share plan 89 177 89 177
------- ------- ------- -------
Weighted average shares
outstanding (diluted) 138,415 135,777 138,006 135,421
======= ======= ======= =======
10. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES:
Effective January 1, 2001, the Company adopted FASB Statement No. 133,
"Accounting for Derivative Instruments and Hedging Activities" (SFAS 133). SFAS
133 requires that a company recognize derivatives as assets or liabilities on
its balance sheet, and also requires that the gain or loss related to the
effective portion of derivatives designated as cash flow hedges be recorded as a
component of other comprehensive income.
At June 30, 2001, the Company has several interest rate swap arrangements in
effect that fix the interest rates for certain of its variable rate obligations.
These derivatives have been designated as cash flow hedges, were documented as
fully effective, and at June 30, 2001 were valued as a liability totaling
$613,000. This liability is included with "other current liabilities" in the
accompanying consolidated balance sheets, and the related loss was recorded, net
of income tax, as a component of accumulated other comprehensive loss.
11. RECENT ACCOUNTING PRONOUNCEMENTS:
In July 2001, the FASB issued Statement No. 141, "Business Combinations" (SFAS
141) and Statement No. 142, "Goodwill and Other Intangible Assets" (SFAS 142).
SFAS 141 eliminates pooling of interest accounting and requires all business
combinations initiated after June 30, 2001 to be accounted for using the
purchase method. SFAS 142 eliminates the amortization of goodwill and certain
other intangible assets and requires that goodwill be evaluated for impairment
by applying a fair value-based test. The Company will adopt the standard
effective January 1, 2002 for previous acquisitions and June 30, 2001 for all
acquisitions that take place after June 30, 2001. Amortization of goodwill was
$12,718,000 for the six months ended June 30, 2001. The Company expects to
complete its first fair value-based impairment tests by June 30, 2002.
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Results of Operations - (second quarter and first six months of 2001 compared to
second quarter and first six months of 2000)
Overview
The following discussion should be read in conjunction with the consolidated
financial statements and related notes.
Equifax, Inc. is a leader in enabling global commerce by bringing buyers and
sellers together through information and knowledge-based businesses. The
Company's global operations include consumer and commercial credit information
services, modeling, database management, analytics, consulting and direct to
consumer services.
On July 7, 2001 the Company completed the spin-off of its Payment Services
industry segment (Certegy) (Note 3). Accordingly, the results of operations
information presented below reflect only the continuing operations of the
company.
In the fourth quarter of 2000, the Company disposed of its global risk
management businesses and its U.K. vehicle information business ("Divested
Operations").
Revenue
Excluding Divested Operations, revenue for the quarter and first six months
increased 10.2% and 16.4% respectively over the comparable periods of 2000.
North America Information Services revenues grew 13.2% for the quarter and 12.2%
for the first six months, driven mainly by strong volume increases in Credit
Information Services, Mortgage Information Services and Consumer Direct.
The growth in revenue was influenced by foreign currency exchange rates and the
acquisition of Consumer Information Services ("CIS") on May 1, 2000. The
strengthening of the U.S. dollar against foreign currencies, mainly in Brazil
and the U.K. negatively impacted revenue by about 3% in each period. Excluding
the impacts of exchange rates and the CIS acquisition, revenue increased
approximately 9% in the quarter and first six months.
Operating Income
Excluding Divested Operations, operating income of $76.2 million for the quarter
and $146.5 million for the first six months increased 14.1% and 17.6%
respectively over the prior year periods. Consolidated operating margins for
the quarter increased to 26.3% versus 25.4% in 2000 as a result of incremental
profit from revenue growth as well as various productivity initiatives.
Other Income, Net
Other income declined $0.5 million in the quarter due primarily to lower
interest income.
Interest Expense
Interest expense decreased from $15.1 million to $11.8 million for the quarter
and from $26.8 million to $24.7 for the first six months as a result of lower
average debt outstanding due to the debt pay-down from the proceeds of the
Divested Operations combined with lower interest rates. Interest expense from
continuing operations was adjusted in each period to allocate interest to
Certegy related to $275 million of the Company's long-term debt assumed by
Certegy on July 7, 2001.
Net Income and Diluted Earnings per Share
Income from continuing operations increased 19.7% for the quarter to $38.3
million and diluted earnings per share increased 16.7% to $0.28 from $0.24 in
2000. For the first six months, income from continuing operations increased
19.6% to $72.4 million and diluted earnings per share increased 15.6% to $0.52
from $0.45 in 2000. Average diluted shares outstanding used in computing diluted
earnings per share increased 1.9% in each period.
13
Segment Results
North American Information Services
North American Information Services includes U.S. Credit Information and
Marketing Services, Mortgage Services, Canadian Operations, Consumer Direct and
Equifax Secure. Revenue in this segment increased 13.2% for the quarter and
12.2% for the first six months.
U.S. Credit Information Services' revenue increased 12.7% for the quarter and
10.9% for the first six months. The increases were driven by an 18% volume
growth, primarily in the financial services, telecommunications, and reseller
vertical markets. Average prices declined approximately 5% in each period.
Marketing Services revenue declined 7.3% for the quarter and 4.4% for the first
six months due to the slow down in the U.S. economy. Mortgage Services revenue
increased of 56.2% for the quarter and 59.1% for the first six months as lower
interest rates continue to fuel refinancing activity. Canadian Operations
realized growth of 11.0% for the quarter and 8.1% for the first six months.
Consumer Direct continues to progress with revenue growth of $6.4 million for
the quarter (resulting in revenue more than five times the prior year's quarter)
and $10.8 million for the first six months in large part due to contributions
from the new ScorePower (TM) credit score product and increased sales from
the Credit Profile (TM) credit report.
Operating income for North American Information Services increased 12.8% to
$79.6 million for the quarter and 16.2% to $151.7 million for the first six
months. The increase is primarily due to the revenue growth in U.S. Credit
Information Services, improved operating performance in direct to consumer
businesses, and continued focus on cost management.
Consumer Information Services
Consumer Information Services includes Direct Marketing Services and City
Directory, which were acquired on May 1, 2000. Revenues totaled $31.7 million
for the quarter and $69.6 million for the first six months, with a $0.6 million
operating loss in the quarter and $3.1 million of operating income for the first
six months. Both businesses were impacted by the slow down in the U.S. economy
during the quarter.
Equifax Europe
Revenue in Equifax Europe, which consists of operations in the United Kingdom,
Spain, Portugal and Italy, declined about 1% in each period. In local
currencies, revenue increased about 6% in the quarter and 7% for the first six
months primarily due to the November 2000 acquisition of SEK in Italy.
Operating income for Equifax Europe declined $2.2 million for the quarter and
$3.6 million for the first six months as a result of slower economic growth and
unfavorable foreign currency impact.
Equifax Latin America
Equifax Latin America includes operations in Brazil, Argentina, Chile, Peru and
El Salvador. Revenue declined 8.8% for the quarter and 7.4% for the first six
months. Weakening local currencies negatively impacted revenue. In local
currencies, revenues increased 5.5% in the quarter and 4.1% for the first six
months.
Operating income for Equifax Latin America decreased $0.4 million for the
quarter and $1.1 million for the first six months mainly due to unfavorable
currency exchanges rates and weak economic conditions in the region. However,
cost containment measures have kept operating margins in the mid twenty percent
range.
Other
Other consists solely of a subcontract, which expires at the end of May 2002,
relating to the Company's lottery subsidiary. Revenue and operating income for
the quarter and first six months remained comparable between periods. Revenue
and operating income will remain comparable until the subcontract's expiration.
General Corporate
General corporate expense was down $1.6 million for the quarter and $0.3 million
for the first six months as a result of continued cost reduction initiatives.
14
Divested Operations
The Company sold its risk management businesses in the U.S., Canada, and the
U.K. in October 2000 and also sold its vehicle information business in the U.K.
in December 2000. These information services businesses, which were disposed
because they no longer fit the Company's ongoing business strategy, have been
classified as Divested Operations and prior year segment information has been
reclassified to conform with this presentation. Revenue generated in the second
quarter and first six months of 2000 totaled $42.8 million and $85.7 million
respectively. Operating income for the quarter and first six months of 2000
totaled $4.6 million and $9.3 million respectively.
Financial Condition
Net cash provided by operating activities from continuing operations for the
first six months of 2001 totaled $94.3 million compared with $60.1 million in
2000. Dividend payments and capital expenditures, exclusive of acquisitions,
were funded by operating cash flows. Capital expenditures during the first six
months of 2001 totaled $27.3 million, exclusive of acquisitions, and are
expected to total approximately $55 million for the full year 2001.
At June 30, 2001, approximately $358 million was available to the Company under
its $750 million revolving credit facility. Should CSC exercise its option to
sell its credit reporting business to the Company (see Note 6), additional
sources of financing would be required. However, the agreement with CSC
requires a six-month notice period, and management believes the Company could
arrange alternative sources of financing within that time to fund this potential
purchase, including public debt markets and additional lines of bank credit.
In conjunction with the spin-off of Certegy, the Company reduced debt by $275
million in July 2001 due to Certegy's assumption of that debt. The Company is
also negotiating a new $650 million multi-year revolving credit facility that is
expected to be finalized in the third quarter of 2001, and will replace the
Company's existing $750 million facility.
Forward-Looking Information
Statements in this Management's Discussion and Analysis and other portions of
this Form 10-Q 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. These statements are based on a number of
assumptions that are inherently subject to significant uncertainties. Many of
the uncertainties are beyond Equifax's control. Factors that could cause actual
results to differ from those expressed or implied by forward-looking statements
include, but are not limited to customer demand for our services, the
availability and reliability of external data sources, changes in government
regulation, and competition as further discussed under the heading "Certain
Factors Affecting Forward Looking Statements" included in Part I in the
Company's annual report on Form 10-K for the year ended December 31, 2000.
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 the Company's foreign subsidiaries can be impacted by changes in foreign
currency exchange rates. The Company's position is to not hedge against this
risk due to the significant cost involved. At June 30, 2001, 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 and intercompany balances associated with
funding a November 2000 acquisition in Italy. 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, 2001, the exchange risk associated
with the Company's intercompany advances to its U.K.
15
operations, as well as the intercompany balances associated with funding the
Italy acquisition were partially hedged by having a portion of the borrowings
under its revolving credit facility denominated in those respective currencies.
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, 2001, approximately $487 million (45%) 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 $4.9 million per year (pre-tax).
16
PART II. OTHER INFORMATION
--------------------------
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
No exhibits are included as part of this report.
(b) Reports on Form 8-K
Form 8-K filed on June 13, 2001 reporting that the Board of Directors
had approved the spin-off of the Payment Services Division (Certegy
Inc.) and including pro forma financials for the post-spin Equifax.
17
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)
Date: August 13, 2001 /s/ Thomas F. Chapman
---------------------
Thomas F. Chapman, Chairman
and Chief Executive Officer
Date: August 13, 2001 /s/ Philip J. Mazzilli
----------------------
Philip J. Mazzilli
Executive Vice President and
and Chief Financial Officer
18