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 September 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.
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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 September 30, 2001
----- ---------------------------------------
Common Stock, $1.25 Par Value 144,877,195
INDEX
Page No.
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Part I. Financial Information (Unaudited)
Item 1. Financial Statements
Consolidated Balance Sheets --
September 30, 2001 and December 31, 2000 2
Consolidated Statements of Income --
Three Months Ended September 30, 2001 and 2000 3
Consolidated Statements of Income --
Nine Months Ended September 30, 2001 and 2000 4
Consolidated Statement of Shareholders' Equity --
Nine Months Ended September 30, 2001 5
Consolidated Statements of Cash Flows --
Nine Months Ended September 30, 2001 and 2000 6
Notes to Consolidated Financial Statements 7 - 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 6. Exhibits and Reports on Form 8-K 16
1
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS (UNAUDITED) SEPTEMBER 30, DECEMBER 31,
(In thousands, except par values) 2001 2000
- ----------------------------------------------------------------------------------------------------------------------------
ASSETS:
Cash and cash equivalents $ 26,683 $ 59,619
Trade accounts receivable, net 214,664 225,972
Other receivables 69,923 66,155
Deferred income tax assets 16,846 18,409
Other current assets 36,263 33,581
----------------- -----------------
Total current assets 364,379 403,736
Property and equipment, net 57,145 66,005
Goodwill 522,131 556,994
Purchased data files 202,661 209,379
Other assets 303,097 329,112
Net assets of discontinued operations -- 385,137
----------------- -----------------
$ 1,449,413 $ 1,950,363
================= =================
LIABILITIES AND SHAREHOLDER'S EQUITY:
Short-term debt and current maturities of long-term debt $ 59,084 $ 54,202
Accounts payable 15,814 16,797
Accrued salaries and bonuses 20,113 24,510
Income taxes payable 15,769 16,373
Other current liabilities 144,715 155,227
----------------- -----------------
Total current liabilities 255,495 267,109
Long-term debt, less current maturities 715,927 993,427
Long-term deferred revenue 22,247 32,864
Deferred income tax liabilities 77,068 80,079
Other long-term liabilities 114,991 136,018
----------------- -----------------
Total liabilities 1,185,728 1,509,497
----------------- -----------------
Commitments and Contingencies (Note 6)
Shareholder's Equity:
Common stock, $1.25 par value; shares authorized - 300,000;
issued - 177,936 in 2001 and 175,991 in 2000;
outstanding - 137,197 in 2001 and 135,835 in 2000 222,420 219,989
Preferred stock, $0.01 par value; shares authorized -
10,000; issued and outstanding - none in 2001 or 2000 -- --
Paid-in capital 365,460 336,527
Retained earnings 755,532 902,475
Accumulated other comprehensive loss (Note 5) (197,168) (148,875)
Treasury stock, at cost, 33,707 shares in 2001 and 33,078 shares in 2000 (792,730) (778,955)
Stock held by employee benefits trusts, at cost,
7,031 shares in 2001 and 7,079 shares in 2000 (89,829) (90,295)
----------------- -----------------
Total shareholders' equity 263,685 440,866
----------------- -----------------
$ 1,449,413 $ 1,950,363
================= =================
The notes on pages 7 through 11 are an integral part of these consolidated
balance sheets.
2
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
THREE MONTHS ENDED
SEPTEMBER 30,
(In thousands, except per share amounts) 2001 2000
- ----------------------------------------------------------------------------------------------------------------------------
Revenue $ 282,392 $ 323,942
----------------- -----------------
Costs of services 121,897 154,194
Selling, general and administrative expenses 79,951 84,035
----------------- -----------------
Total operating expenses 201,848 238,229
----------------- -----------------
Operating income 80,544 85,713
Other income (expense), net (3,912) 24
Minority interests in earnings, net of tax (1,018) (1,833)
Interest expense (12,301) (16,137)
----------------- -----------------
Income from continuing operations before income taxes 63,313 67,767
Provision for income taxes 27,525 29,425
----------------- -----------------
Income from continuing operations 35,788 38,342
----------------- -----------------
Discontinued operations (Note 3):
Income from discontinued operations, net of income
taxes of $13,114 -- 25,976
----------------- -----------------
Net income $ 35,788 $ 64,318
================= =================
Per common share (basic):
Income from continuing operations $ 0.26 $ 0.29
Discontinued operations -- 0.19
----------------- -----------------
Net income $ 0.26 $ 0.48
================= =================
Shares used in computing basic earnings per share 137,418 134,355
================= =================
Per common share (diluted):
Income from continuing operations $ 0.26 $ 0.28
Discontinued operations -- 0.19
----------------- -----------------
Net income $ 0.26 $ 0.47
================= =================
Shares used in computing diluted earnings per share 140,240 135,796
================= =================
Dividends per common share $ 0.0200 $ 0.0925
================= =================
The notes on pages 7 through 11 are an integral part of these consolidated
statements.
3
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30,
(In thousands, except per share amounts) 2001 2000
- ----------------------------------------------------------------------------------------------------------------------------
Revenue $ 857,146 $ 903,306
----------------- -----------------
Costs of services 372,900 438,745
Selling, general and administrative expenses 257,192 244,947
----------------- -----------------
Total operating expenses 630,092 683,692
----------------- -----------------
Operating income 227,054 219,614
Other income (expense), net (1,035) 2,831
Minority interests in earnings, net of tax (2,567) (4,696)
Interest expense (36,990) (42,941)
----------------- -----------------
Income from continuing operations before income taxes 186,462 174,808
Provision for income taxes 78,262 75,901
----------------- -----------------
Income from continuing operations 108,200 98,907
----------------- -----------------
Discontinued operations (Note 3):
Income from discontinued operations, net of income
taxes of $21,431 in 2001 and $34,247 in 2000 33,612 60,716
Costs associated with effecting the spin-off, net of
income tax benefit of $8,076 (28,424) --
----------------- -----------------
Total discontinued operations 5,188 60,716
----------------- -----------------
Net income $ 113,388 $ 159,623
================= =================
Per common share (basic):
Income from continuing operations $ 0.79 $ 0.74
Discontinued operations 0.04 0.45
----------------- -----------------
Net income $ 0.83 $ 1.19
================= =================
Shares used in computing basic earnings per share 136,653 134,121
================= =================
Per common share (diluted):
Income from continuing operations $ 0.78 $ 0.73
Discontinued operations 0.04 0.45
----------------- -----------------
Net income $ 0.82 $ 1.18
================= =================
Shares used in computing diluted earnings per share 138,747 135,540
================= =================
Dividends per common share $ 0.2050 $ 0.2775
================= =================
The notes on pages 7 through 11 are an integral part of these consolidated
statements.
4
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (UNAUDITED)
NINE MONTHS ENDED
(In thousands) SEPTEMBER 30, 2001
- ----------------------------------------------------------------------------------------------------------------------------
COMMON STOCK:
Balance at beginning of period $ 219,989
Shares issued under stock plans 2,431
-----------------
Balance at end of period $ 222,420
=================
PAID-IN CAPITAL:
Balance at beginning of period $ 336,527
Shares issued under stock plans 27,525
Other 1,408
-----------------
Balance at end of period $ 365,460
=================
RETAINED EARNINGS:
Balance at beginning of period $ 902,475
Net income 113,388
Cash dividends (29,413)
Spin-off dividend (230,918)
-----------------
Balance at end of period $ 755,532
=================
ACCUMULATED OTHER COMPREHENSIVE LOSS (Note 5):
Balance at beginning of period $ (148,875)
Adjustments during period (48,293)
-----------------
Balance at end of period $ (197,168)
=================
TREASURY STOCK:
Balance at beginning of period $ (778,955)
Treasury stock purchased (14,254)
Shares issued under stock plans 479
-----------------
Balance at end of period $ (792,730)
=================
STOCK HELD BY EMPLOYEE BENEFITS TRUSTS:
Balance at beginning of period $ (90,295)
Shares issued under stock plans 466
-----------------
Balance at end of period $ (89,829)
=================
The notes on pages 7 through 11 are an integral part of this consolidated statement.
5
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30,
(In thousands) 2001 2000
- ----------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 113,388 $ 159,623
Exclude discontinued operations:
Income from discontinued operations (33,612) (60,716)
Costs associated with effecting the spinoff 28,424 --
----------------- -----------------
Income from continuing operations 108,200 98,907
Adjustments to reconcile income from continuing operations to
net cash provided by operating activities of continuing operations:
Depreciation and amortization 79,947 80,514
Loss on sale of businesses 5,849 1,632
Changes in assets and liabilities:
Accounts receivable, net 2,539 (26,538)
Current liabilities, excluding debt (18,971) (23,917)
Other current assets (1,235) (8,491)
Deferred income taxes 7,135 6,550
Other long-term liabilities, excluding debt (6,205) (4,659)
Other assets (12,218) (12,448)
----------------- -----------------
Net cash provided by operating activities of continuing operations 165,041 111,550
----------------- -----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment (9,257) (12,773)
Additions to other assets, net (28,043) (33,238)
Acquisitions, net of cash acquired (35,732) (287,588)
Investments in unconsolidated affiliates (5,000) (4,748)
Proceeds from sale of assets 7,000 0
Deferred payments on prior year acquisitions (3,097) (1,840)
----------------- -----------------
Net cash used in investing activities of continuing operations (74,129) (340,187)
----------------- -----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net additions (payments) on short-term debt 6,048 (1,777)
Net additions (payments) on long-term debt (274,957) 219,196
Dividends paid (29,413) (39,200)
Treasury stock purchases (14,254) (6,517)
Proceeds from exercise of stock options 29,706 9,030
Other 1,963 2,649
----------------- -----------------
Net cash (used in) provided by financing activities of continuing operations (280,907) 183,381
----------------- -----------------
Effect of foreign currency exchange rates on cash (2,692) (2,533)
Net cash provided by discontinued operations 159,751 37,125
----------------- -----------------
Net cash used (32,936) (10,664)
Cash and cash equivalents, beginning of period 59,619 102,979
----------------- -----------------
Cash and cash equivalents, end of period $ 26,683 $ 92,315
================= =================
The notes on pages 7 through 11 are an integral part of these consolidated
statements.
6
EQUIFAX INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
September 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 September 30, 2001, and the results of operations
for the three and nine month periods ending September 30, 2001 and 2000 and the
cash flows for the nine month periods ending September 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.
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.
2. NATURE OF OPERATIONS:
The Company principally provides information services to businesses to help them
grant credit and market to their customers (see Note 7 for segment information).
The Company's principal markets include retailers, banks and other financial
institutions, the transportation, telecommunications, 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 in 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 a dividend of one share of Certegy stock for each two
shares of Equifax stock owned. This non-cash dividend totaled $230.9 million.
Also in connection with the spin-off, the Company reduced debt by $275 million
in July 2001 following Certegy's assumption of that debt.
As a result of the spin-off, the Company's 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.
7
Summarized financial information for discontinued operations is as follows:
Three Months Ended Nine Months Ended
September 30 September 30
---------------------------------------- --------------------------------------
(In thousands) 2001 2000 2001 2000
- -------------- ------------------ ----------------- --------------- -----------------
Revenue $ -- $193,964 $398,273 $563,894
Income before income taxes and
minority interest expense -- 40,287 55,988 95,173
Net income -- 25,976 33,612 60,716
December 31,
(In thousands) 2000
- ------------- -----------------
Current assets $201,173
Total assets 504,411
Current liabilities 159,115
Total liabilities 176,562
Cumulative translation adjustment (57,288)
Net assets of discontinued operations 385,137
4. ACQUISITIONS AND DIVESTITURES:
During the first nine months of 2001, the Company acquired the credit files of
three affiliated credit reporting agencies located in the United States and nine
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 $36.0 million, and were acquired for cash. They resulted in $15.7 million of
goodwill and $16.8 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.
In October 2001, the Company sold its City Directory business which had been
acquired from R.L. Polk & Company in May 2000. The resulting pre-tax loss of
$5.8 million ($4.9 million after tax, or $0.03 per share) was recorded in the
consolidated statement of income as a charge to "other income, net" in
September.
In October 2000, the Company sold its risk management businesses located in the
U.S., Canada, and the U.K., resulting in a pre-tax loss of $1.6 million recorded
in other income, net in the third quarter of 2000. In December 2000, the
Company sold its vehicle information business in the U.K. resulting in a pre-tax
loss of $2.3 million recorded in other income, net in the fourth quarter of
2000.
Under U.S. generally accepted accounting principles, the results of operations
of these divested businesses are included in these financial statements in
continuing operations. For segment reporting purposes, these businesses are
included in Divested Operations. For management's discussion and analysis
purposes, these businesses are excluded from the discussion of results of
operations.
5. SHAREHOLDERS' EQUITY:
Treasury Stock. During the third quarter of 2001, the Company repurchased
650,000 of its common shares through open market transactions at an aggregate
cost of $14,254,000. No shares were repurchased during the first two quarters
of 2001. As of September 30, 2001, approximately $80 million remained
authorized for future share repurchases.
8
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 nine-month periods ending
September 30, 2001 and 2000 is as follows:
Nine Months Ended
September 30
(In thousands) 2001 2000
- -------------- -------------------- --------------------
Net income $113,388 $159,623
Change in cumulative foreign
currency translation adjustment (46,773) (29,821)
Change in cumulative loss from
cash flow hedging transactions (Note 9) (1,520) --
-------------------- --------------------
Comprehensive income $ 65,095 $129,802
==================== ====================
Accumulated other comprehensive loss at September 30, 2001 and December 31, 2000
consists of the following components:
September 30, December 31,
(In thousands) 2001 2000
- -------------- -------------------- --------------------
Cumulative foreign currency
translation adjustment $(192,314) $(145,541)
Cumulative loss from cash flow
hedging transactions (Note 9) (1,520) --
Adjustment for minimum liability
under supplemental retirement plan (3,334) (3,334)
-------------------- --------------------
Accumulated other comprehensive loss $(197,168) $(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. 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. Beginning
9
with the third quarter of 2001, the Company also reclassified the City Directory
business from Consumer Information Services to Divested Operations.
Operating revenue and operating income from continuing operations by segment for
the third quarter and first nine months of 2001 and 2000 (restated for the
changes discussed above) are as follows:
Third Quarter Nine Months
-------------------------------------- --------------------------------------
(In thousands) 2001 2000 2001 2000
- -------------- ----------------- --------------- ----------------- ---------------
Operating Revenue:
- ------------------
North American Information Services $187,796 $170,534 $562,636 $504,598
Consumer Information Services 22,884 31,818 71,686 51,641
Equifax Europe 33,908 34,637 105,126 106,442
Equifax Latin America 26,963 30,715 81,234 89,354
Other 2,409 2,409 7,227 7,227
----------------- --------------- ----------------- ---------------
273,960 270,113 827,909 759,262
Divested Operations 8,432 53,829 29,237 144,044
----------------- --------------- ----------------- ---------------
$282,392 $323,942 $857,146 $903,306
================= =============== ================= ===============
Operating Income (Loss):
- ------------------------
North American Information Services $ 80,167 $ 71,736 $231,913 $202,351
Consumer Information Services 2,991 5,062 8,179 6,417
Equifax Europe (335) 3,227 (219) 6,928
Equifax Latin America 6,657 9,637 18,591 22,638
Other 2,217 2,217 6,651 6,651
General Corporate Expense (9,709) (9,590) (34,573) (34,774)
----------------- --------------- ----------------- ---------------
81,988 82,289 230,542 210,211
Divested Operations (1,444) 3,424 (3,488) 9,403
----------------- --------------- ----------------- ---------------
$ 80,544 $ 85,713 $227,054 $219,614
================= =============== ================= ===============
Total assets from continuing operations by segment at September 30, 2001 and
December 31, 2000 (restated for the changes discussed above) are as follows:
September 30, December 31,
(In thousands) 2001 2000
- -------------- ---------------- ----------------
North American Information Services $ 588,958 $ 607,421
Consumer Information Services 244,457 251,448
Equifax Europe 207,387 224,977
Equifax Latin America 192,363 251,628
Corporate 199,404 213,493
Other 3,624 2,948
Divested Operations 13,220 13,311
------------------ ------------------
$1,449,413 $1,565,226
================== ==================
Asset declines in Europe and Latin America are impacted from declines in the
foreign currency exchange rates.
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:
Third Quarter Nine Months
----------------------------------------- --------------------------------------
(In thousands) 2001 2000 2001 2000
- ------------- ------------------ ------------------ ------------------ ---------------
Weighted average shares
outstanding (basic) 137,418 134,355 136,653 134,121
Effect of dilutive securities:
Stock options 2,733 1,264 2,005 1,242
Performance share plan 89 177 89 177
------------------ ------------------ ------------------ ---------------
Weighted average shares
outstanding (diluted) 140,240 135,796 138,747 135,540
================== ================== ================== ===============
9. 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 September 30, 2001, the Company has an interest rate swap arrangement in
effect that fixes the interest rate for one of its variable rate obligations.
This derivative has been designated as a cash flow hedge, was documented as
fully effective, and at September 30, 2001 was valued as a liability totaling
$2.5 million. 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.
At September 30, 2001, the Company also has an interest rate swap arrangement in
place to float the interest rate on $200 million of its fixed rate senior notes
through their maturity date in 2005. This derivative has been designated as a
fair value hedge and is fully effective, and the value of the swap at September
30, 2001 is equivalent to the change in the value of the related debt.
10. 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 interests 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
$19.0 million for the nine months ended September 30, 2001. The Company expects
to complete its first fair value-based impairment tests by June 30, 2002.
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Results of Operations - (third quarter and first nine months of 2001 compared to
third quarter and first nine months of 2000)
Overview
The following discussion should be read in conjunction with the consolidated
financial statements and related notes.
Equifax Inc. is a leading global information services company. The Company's
operations include consumer and commercial credit information services,
marketing services and direct to consumer services. Among our key assets is the
world's largest repository of consumer credit information and extensive consumer
lifestyle and demographic databases.
On July 7, 2001 the Company completed the spin-off of its Payment Services
industry segment (Certegy) (Note 3). Certegy's results are reflected as
discontinued operations.
In October 2001, the Company sold its City Directory business (Note 4), and in
the fourth quarter of 2000, the Company disposed of its global risk management
and U.K. vehicle information businesses. The operating results of these
businesses have been reclassified to "Divested Operations" for segment
reporting.
The results of operations discussed below address the continuing operations of
the Company excluding Certegy and the Divested Operations. The table below
shows the normalized results by making the following adjustments:
. Exclude revenue and operating expenses of the divested businesses
. Exclude the losses on sale of the divested businesses
. Adjust other income and interest expense to reflect the impact of the
proceeds from sales of the 2000 divestitures as if they had been received
at the beginning of the period
. Adjusting the income tax rate to 41.2% for all periods
Third Quarter: Year-To-Date September 30:
------------------------------------ ------------------------------------
(In millions, except EPS) 2001 2000 2001 2000
- ----------------------------------------- --------------- --------------- --------------- ---------------
Revenue $ 274.0 $ 270.1 $ 827.9 $ 759.3
Operating expenses (192.0) (187.8) (597.4) (549.1)
--------------- --------------- --------------- ---------------
Operating income 82.0 82.3 230.5 210.2
Interest expense (12.3) (13.8) (37.0) (36.0)
Other 0.9 0.9 2.2 3.0
--------------- --------------- --------------- ---------------
Income before income taxes 70.6 69.3 195.8 177.2
Provision for income taxes (29.1) (28.5) (80.6) (72.9)
--------------- --------------- --------------- ---------------
Income from continuing operations $ 41.5 $ 40.8 $ 115.2 $ 104.3
=============== =============== =============== ===============
Average diluted shares 140.2 135.8 138.7 135.5
Earnings per share from
continuing operations $ 0.30 $ 0.30 $ 0.83 $ 0.77
Revenue
Revenue for the third quarter and first nine months increased 1% and 9%
respectively over the comparable periods of 2000. North America Information
Services revenues grew 10% for the quarter and 11.5% for the first nine months,
driven by growth in U.S. Credit Information Services, Mortgage Services,
Canadian Operations and Consumer Direct.
12
Revenue growth was negatively impacted by 3% due to foreign currency exchange
rates, mainly in Brazil. Excluding the impacts of exchange rates and the CIS
acquisition in May 2000, revenue increased 4% in the quarter and 7.5% for the
first nine months.
Operating Income
Operating income of $82.0 million for the quarter declined slightly from the
prior year. Operating income of $230.5 million for the first nine months
increased 10% over the prior year period. Each period was negatively impacted
approximately two percent by exchange rates. Consolidated operating margins of
30% for the quarter and 28% year-to-date were comparable with the prior year
periods.
Interest Expense
Interest expense decreased $1.5 million for the quarter resulting from lower
average debt outstanding combined with declining interest rates. For the first
nine months, interest expense was $1.0 million higher than the prior year due to
the CIS acquisition in 2000. Interest expense from continuing operations was
adjusted in historical periods 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 $0.7 million in the third quarter
and $10.9 million year-to-date. EPS from continuing operations for the third
quarter was $0.30 in both years, while EPS for the first nine months increased
$0.06 to $0.83 in 2001.
Average diluted shares outstanding used in computing diluted earnings per share
increased 3% in the third quarter and 2% year-to-date. The increases resulted
from stock option exercises, higher calculated share dilution due to the
Company's higher stock price, and an adjustment increasing outstanding stock
options associated with the Certegy spin-off.
Segment Results (Note 7)
North American Information Services
North American Information Services includes U.S. Credit Information Services,
Credit Marketing Services, Mortgage Services, Canadian Operations and Consumer
Direct. Revenue in this segment increased 10% for the quarter and 11.5% for the
first nine months.
U.S. Credit Information Services' revenue increased 11% for the quarter and for
the first nine months. Increased credit reporting volumes from
telecommunications, financial and mortgage industry customers were the key
growth drivers.
Consumer Direct continues to progress with revenue growth of $4.2 million for
the quarter and $15.0 million for the first nine 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.
Credit Marketing Services revenue declined 12% in the quarter and 7% in the
first nine months due to the slowing U.S. economy. The Company anticipates the
economy to continue impacting this business in the fourth quarter.
Operating income for North American Information Services increased 12% for the
quarter and 15% for the first nine months due to strong revenue growth combined
with continued focus on cost management. Operating margins improved slightly
despite a decrease in Credit Marketing Services profit which resulted from lower
revenues.
Consumer Information Services
Consumer Information Services consists solely of Direct Marketing Services
operations, which were acquired on May 1, 2000. Revenues for the third quarter
declined $8.9 million from the prior year as a result of the weak U.S. economy.
The Company expects this trend to continue in the fourth quarter as customers
continue to slow expenditures for marketing initiatives. Operating income of
$3.0 million in the
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quarter produced an operating margin of 13%, an improvement over the 10%
margin generated in the second quarter.
Equifax Europe
Revenue in Equifax Europe, which consists of operations in the United Kingdom,
Ireland, Spain, Portugal and Italy, declined $0.7 million in the quarter and
$1.3 million in the first nine months. In local currencies, revenue in the
quarter was flat with the prior year period and up 4.5% for the first nine
months primarily due to the November 2000 acquisition of SEK in Italy.
Operating losses totaled $0.3 million for the quarter and $0.2 million for the
first nine months compared with operating income of $3.2 million and $6.9
million, respectively, in the prior year. These declines primarily resulted
from slower economic growth, which has adversely affected revenue.
Equifax Latin America
Equifax Latin America includes operations in Brazil, Argentina, Chile, Peru,
Uruguay, and El Salvador. Including currency impacts, revenue declined 12% for
the quarter and 9% for the first nine months. In local currencies, revenues
increased 7% in the quarter and 5% for the first nine months.
Operating income decreased $3.0 million for the quarter and $4.0 million for the
first nine months mainly due to weak currencies and economic conditions in the
region. Cost containment measures helped maintain operating margins of 25% in
the third quarter and 23% for the nine-month period.
Other
Other consists solely of a subcontract related to the Company's lottery
subsidiary that expires at the end of May 2002. Revenue and operating income
for the third quarter and first nine months remained comparable between periods.
General Corporate
General corporate expense for the third quarter and first nine months was
comparable between periods.
Divested Operations
In October 2001 the Company sold the City Directory business it had acquired
from R.L. Polk & Co. in May 2000 (Note 4). In the fourth quarter of 2000, the
Company sold its risk management businesses in the U.S., Canada, and the U.K.
and its vehicle information business in the U.K. These businesses have been
reclassified as Divested Operations for segment reporting purposes.
Financial Condition
Net cash provided by operating activities from continuing operations for the
first nine months of 2001 totaled $165.0 million compared with $111.6 million in
2000. Dividend payments and capital expenditures, exclusive of acquisitions,
were funded by operating cash flows.
Capital expenditures during the first nine months of 2001 totaled $37.3 million,
exclusive of acquisitions, and are expected to total approximately $50 million
for 2001. During the third quarter, the Company repurchased 650,000 shares of
treasury stock at a total cost of $14.3 million. At September 30, 2001,
approximately $80 million remained authorized for future repurchases.
The Company reduced debt by $275 million in July 2001 following Certegy's
assumption of that debt. In October 2001, the Company replaced its $750 million
credit facility with a new $465 million multi-year revolving credit facility.
Approximately $115 million remained borrowed under the facility at September 30,
2001.
As discussed in Note 6, should CSC exercise its option to sell its credit
reporting business to the Company, additional sources of financing would be
required. The Company believes it can arrange alternative
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sources of financing to fund this potential purchase, including public debt
markets and additional lines of bank credit.
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 September 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. Subsequent to September 30, 2001,
the exchange risk associated with the Company's intercompany advances to its
U.K. 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 new 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 September 30, 2001, approximately $377 million (49%) 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 $3.8 million per year (pre-tax).
15
PART II. OTHER INFORMATION
--------------------------
ITEM 6. EXHIBITS AND REPORTS ON 8-K
(a) Exhibits
3.2 Bylaws of Equifax Inc. as Amended and Restated on August 1, 2001
(b) Reports on Form 8-K
Registrant filed two reports on Form 8-K during the quarter for which this
report is filed.
On July 20, 2001 Registrant filed a report on Form 8-K relating to the
distribution of 69,668,466 shares of common stock of Certegy Inc. to
Equifax Inc. shareholders of record as of June 27, 2001 (the "Record
Date") in which Registrant's shareholders received one share of Certegy
common stock for every two shares of Registration's common stock and a
cash payment in lieu of fractional shares. Financial statements filed
with this report include revised Company Pro Forma Consolidated Financial
Data (incorporated by reference to Exhibit 99.1 of Registrant's Report on
8-K, filed June 13, 2001, as amended), including (i) revised Unaudited Pro
Forma Consolidated Statements of Income for the quarter ended March 31,
2001 and the year ended December 31, 2001, (ii) Unaudited Pro Forma
Consolidated Balance Sheet as of March 31, 2001, (iii) revised notes to
Pro Forma Consolidated Financial Data (unaudited), and (iv) revised
Unaudited Restated Historical Consolidated Statements of Income for the
years ended December 31, 1998, 1999 and 2000 (by quarter) and the three
months ended March 31, 2001.
On July 20, 2001 Registrant filed a report on Form 8-K/A amending its
report on Form 8-K filed on June 13, 2001 (the "Initial Report") to amend
Items 7 and 9 and Exhibits 99.1 and 99.2 in their respective entireties
for purposes of reflecting the inclusion of an allocation of interest
expense from Equifax to Certegy Inc. in the Restated Consolidated
Financial Data filed as Exhibit 99.1(d) to the Initial Report, eliminating
an adjustment for this allocation in the Unaudited Pro Forma Consolidated
Statements of Income filed as Exhibit 99.1(a) to the Initial Report, and
eliminating an adjustment for this allocation in the Normalized
Consolidated Financial Data filed as Exhibit 99.2 to the Initial Report.
Financial statements filed with this report include Pro Forma Consolidated
Financial Data, including (i) revised Unaudited Pro Forma Consolidated
Statements of Income for the quarter ended March 31, 2001 and the year
ended December 31, 2001, (ii) Unaudited Pro Forma Consolidated Balance
Sheet as of March 31, 2001, (iii) revised notes to Pro Forma Consolidated
Financial Data (unaudited), and (iv) revised Unaudited Restated Historical
Consolidated Statements of Income for the years ended December 31, 1998,
1999 and 2000 (by quarter) and the three months ended March 31, 2001.
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)
Date: November 13, 2001 /s/Thomas F. Chapman
-----------------------------
Thomas F. Chapman, Chairman
and Chief Executive Officer
Date: November 13, 2001 /s/Philip J. Mazzilli
-----------------------------
Philip J. Mazzilli
Executive Vice President and
Chief Financial Officer
17
INDEX TO EXHIBITS
The following documents are being filed with this Report.
Exhibit No. Description
- ----------- -----------
3.2 Bylaws of Equifax Inc., as Amended and Restated on August 1, 2001
18