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 March 31, 2002
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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 March 31, 2002
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Common Stock, $1.25 Par Value 144,784,385
INDEX
Page No.
Part I. Financial Information (Unaudited)
Item 1. Financial Statements
Consolidated Balance Sheets --
March 31, 2002 and December 31, 2001 3
Consolidated Statements of Income --
Three Months Ended March 31, 2002 and 2001 4
Consolidated Statement of Shareholders' Equity --
Three Months Ended March 31, 2002 5
Consolidated Statements of Cash Flows --
Three Months Ended March 31, 2002 and 2001 6
Notes to Consolidated Financial Statements 7 - 10
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11 - 14
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 15
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K 16
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS MARCH 31, DECEMBER 31,
(In millions, except par values) 2002 2001
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(Unaudited)
ASSETS:
Cash and cash equivalents $ 29.6 $ 33.2
Trade accounts receivable, net 191.0 197.0
Other receivables 64.7 69.2
Deferred income tax assets 26.1 26.4
Other current assets 25.8 32.2
-------- --------
Total current assets 337.2 358.0
Property and equipment, net 49.8 55.2
Goodwill 522.5 516.5
Purchased data files 209.9 207.0
Other assets 295.5 285.9
-------- --------
$1,414.9 $1,422.6
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY:
Short-term debt and current maturities of long-term debt $ 54.4 $ 62.0
Accounts payable 10.1 13.2
Accrued salaries and bonuses 11.6 26.5
Income taxes payable 15.4 4.0
Other current liabilities 146.1 170.2
-------- --------
Total current liabilities 237.6 275.9
Long-term debt, less current maturities 699.4 693.6
Long-term deferred revenue 16.3 17.2
Deferred income tax liabilities 91.3 88.6
Other long-term liabilities 93.9 103.8
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Total liabilities 1,138.5 1,179.1
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Commitments and Contingencies (Note 6)
Shareholders' Equity:
Common stock, $1.25 par value; shares authorized - 300.0; issued - 180.0 in 2002
and 178.4 in 2001;
outstanding - 137.0 in 2002 and 136.2 in 2001 225.0 223.0
Preferred stock, $0.01 par value; shares authorized -
10.0; issued and outstanding - none in 2002 or 2001 -- --
Paid-in capital 399.4 376.7
Retained earnings 797.6 758.8
Accumulated other comprehensive loss (Note 5) (206.3) (197.2)
Treasury stock, at cost, 36.1 shares in 2002 and 35.2 shares in 2001 (850.4) (828.0)
Stock held by employee benefits trusts, at cost,
6.9 shares in 2002 and 7.0 shares in 2001 (88.9) (89.8)
-------- --------
Total shareholders' equity 276.4 243.5
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$1,414.9 $1,422.6
======== ========
See Notes to Consolidated Financial Statements.
3
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
(In millions, except per share amounts) 2002 2001
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Revenue $261.4 $285.2
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Costs of services 112.2 116.5
Selling, general and administrative expenses 70.5 92.0
Goodwill amortization (Note 10) - 6.4
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Total operating expenses 182.7 214.9
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Operating income 78.7 70.3
Other income, net 1.5 1.5
Minority interests in earnings, net of tax (0.5) (0.9)
Interest expense (10.1) (12.9)
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Income from continuing operations before income taxes 69.6 58.0
Provision for income taxes (27.9) (23.9)
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Income from continuing operations 41.7 34.1
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Discontinued operations (Note 3):
Income from discontinued operations, net of income
taxes of $8.8 in 2001 - 14.0
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Net income $ 41.7 $ 48.1
====== ======
Per common share (basic):
Income from continuing operations $ 0.31 $ 0.25
Discontinued operations - 0.10
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Net income $ 0.31 $ 0.35
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Shares used in computing basic earnings per share 136.4 136.0
====== ======
Per common share (diluted):
Income from continuing operations $ 0.30 $ 0.25
Discontinued operations - 0.10
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Net income $ 0.30 $ 0.35
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Shares used in computing diluted earnings per share 139.3 137.6
====== ======
Dividends per common share $0.020 $0.093
====== ======
See Notes to Consolidated Financial Statements.
4
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (UNAUDITED)
THREE MONTHS ENDED
(In millions) MARCH 31, 2002
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COMMON STOCK:
Balance at beginning of period $ 223.0
Shares issued under stock plans 2.0
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Balance at end of period $ 225.0
=======
PAID-IN CAPITAL:
Balance at beginning of period $ 376.7
Shares issued under stock plans 22.6
Other 0.1
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Balance at end of period $ 399.4
=======
RETAINED EARNINGS:
Balance at beginning of period $ 758.8
Net income 41.7
Cash dividends (2.9)
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Balance at end of period $ 797.6
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ACCUMULATED OTHER COMPREHENSIVE LOSS (Note 5):
Balance at beginning of period $(197.2)
Adjustments during period (9.1)
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Balance at end of period $(206.3)
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TREASURY STOCK:
Balance at beginning of period $(828.0)
Treasury stock purchased (22.8)
Shares issued under stock plans 0.4
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Balance at end of period $(850.4)
=======
STOCK HELD BY EMPLOYEE BENEFITS TRUSTS:
Balance at beginning of period $ (89.8)
Shares issued under stock plans 0.9
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Balance at end of period $ (88.9)
=======
See Notes to Consolidated Financial Statements.
5
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
(In millions) 2002 2001
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 41.7 $ 48.1
Exclude discontinued operations:
Income from discontinued operations - (14.0)
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Income from continuing operations 41.7 34.1
Adjustments to reconcile income from continuing operations to
net cash provided by operating activities of continuing operations:
Depreciation and amortization 19.3 26.8
Changes in assets and liabilities:
Accounts receivable, net 11.1 (4.2)
Current liabilities, excluding debt (19.7) (17.1)
Other current assets 6.8 (3.0)
Deferred income taxes 3.2 2.5
Other long-term liabilities, excluding debt (2.7) (3.4)
Other assets (22.1) (5.7)
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Cash provided by operating activities 37.6 30.0
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CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment (0.9) (2.8)
Additions to other assets, net (4.5) (11.2)
Acquisitions, net of cash acquired (22.5) (21.6)
Investments in unconsolidated affiliates - (5.0)
Deferred payments on prior year acquisitions (3.1) (3.2)
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Cash used by investing activities (31.0) (43.8)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Net additions (payments) on short-term debt (6.5) 8.8
Net additions (payments) on long-term debt 6.4 (11.7)
Dividends paid (2.9) (13.2)
Treasury stock purchases (30.1) -
Proceeds from exercise of stock options 23.1 4.4
Other 0.2 0.9
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Cash used by financing activities (9.8) (10.8)
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Effect of foreign currency exchange rates on cash (0.4) (0.8)
Cash used by discontinued operations - (8.8)
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Decrease in cash and cash equivalents (3.6) (34.2)
Cash and cash equivalents, beginning of period 33.2 59.6
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Cash and cash equivalents, end of period $ 29.6 $ 25.4
====== ======
See Notes to Consolidated Financial Statements.
6
EQUIFAX INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
March 31, 2002
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 March 31, 2002, and the results of operations and
cash flows for the three month periods ending March 31, 2002 and 2001. All
adjustments made have been of a normal recurring nature. Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with accounting principles generally accepted in the U.S. 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, 2001.
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 primary 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:
In July 2001, the Company completed the spin-off of its Payment Services
business segment (Certegy) through a tax-free dividend of all of its Certegy
stock to Equifax shareholders. Shareholders received a dividend of one share of
Certegy stock for each two shares of Equifax stock owned. As a result of the
spin-off, the Company's historical financial statements have been restated with
Certegy's 2001 results of operations and cash flows isolated and shown as
"discontinued operations".
4. ACQUISITIONS AND DIVESTITURE:
During the first three months of 2002, the Company acquired the credit files of
two affiliated credit reporting agencies located in the United States and one
agency in Canada. These acquisitions were accounted for as purchases, had a
total purchase price of $22.6 million, and were acquired for cash of $22.5
million and notes payable of $0.1 million. They resulted in $12.3 million of
goodwill and $9.9 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 April 2002, the
Company completed the purchase of the remaining 20% of its information services
company in Brazil for approximately $37 million.
In October 2001, the Company sold its City Directory business, which had been
acquired from R.L. Polk & Company in May 2000. For segment reporting purposes,
this business is included in Divested Operations.
7
5. SHAREHOLDERS' EQUITY:
Treasury Stock. During the first quarter of 2002, the Company repurchased
875,500 of its common shares through open market transactions at an aggregate
cost of $22.8 million. Another $7.3 million was spent in January 2002 to settle
stock purchases that occurred the last three business days of 2001. As of March
31, 2002, approximately $272 million remained authorized for future share
repurchases.
Comprehensive Income. Comprehensive income for the three-month periods ending
March 31, 2002 and 2001 is as follows:
Three Months Ended
March 31
(In millions) 2002 2001
- ------------- ---- ----
Net income $41.7 $ 48.1
Change in cumulative foreign
currency translation adjustment (9.4) (34.6)
Change in cumulative loss from
cash flow hedging transactions (Note 9) 0.3 (1.4)
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Comprehensive income $32.6 $12.1
===== ======
Accumulated other comprehensive loss at March 31, 2002 and December 31, 2001
consists of the following components:
March 31, December 31,
(In millions) 2002 2001
- ------------- --------- ------------
Cumulative foreign currency
translation adjustment $(201.1) $(191.7)
Cumulative loss from cash flow
hedging transactions (Note 9) (0.5) (0.8)
Adjustment for minimum liability
under supplemental retirement plan (4.7) (4.7)
-------- -------
Accumulated other comprehensive loss $(206.3) $(197.2)
======= =======
6. AGREEMENT WITH COMPUTER SCIENCES CORPORATION:
The Company has an agreement with Computer Sciences Corporation and certain of
its affiliates (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
renewed by CSC 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:
The results of operations of the City Directory business divested October 2001
are classified as Divested Operations. Goodwill amortization in 2001 for all
business segments has been reclassified to a separate line to provide for
comparability with 2002.
Operating revenue and operating income by segment for the first quarter of 2002
and 2001 (restated for the changes discussed above) are as follows:
8
First Quarter
----------------
(In millions) 2002 2001
- ------------- ---- ----
Operating Revenue:
- -----------------
North American Information Services $206.1 $207.1
Equifax Europe 33.1 35.8
Equifax Latin America 19.8 27.2
Other 2.4 2.4
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261.4 272.5
Divested Operations -- 12.7
------- -------
$261.4 $285.2
======= =======
Operating Income (Loss):
- -----------------------
North American Information Services $ 82.5 $ 78.0
Equifax Europe 2.1 0.6
Equifax Latin America 4.1 7.3
Other 2.4 2.2
General Corporate Expense (12.4) (12.7)
------- -------
78.7 75.4
Divested Operations -- 1.3
Goodwill Amortization -- (6.4)
------- -------
$ 78.7 $ 70.3
======= =======
Total assets by segment at March 31, 2002 and December 31, 2001 are as follows:
March 31, December 31,
(In millions) 2002 2001
- ------------- --------- ------------
North American Information Services $ 830.8 $ 825.5
Equifax Europe 186.1 192.4
Equifax Latin America 181.7 190.6
Other 3.8 3.7
Corporate 212.5 210.4
-------- --------
$1,414.9 $1,422.6
======== =========
The asset decline in Latin America resulted primarily from a decline in the
foreign currency exchange rate in Argentina.
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:
First Quarter
----------------
(In millions) 2002 2001
- ------------- ---- ----
Weighted average shares
outstanding (basic) 136.4 136.0
Effect of dilutive securities:
Stock options 2.9 1.5
Long-term incentive plan -- 0.1
------ ------
Weighted average shares
outstanding (diluted) 139.3 137.6
====== ======
9
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 March 31, 2002, the Company has an interest rate swap agreement in effect
that fixes the interest rate for one of its variable rate obligations through
its duration in 2010. This derivative has been designated as a cash flow hedge,
was documented as fully effective, and at March 31, 2002 was valued as a
liability totaling $0.9 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 March 31, 2002, the Company also has interest rate swap agreements in place
to float the interest rate on $200 million of its fixed rate senior notes
through their maturity date in 2005. These derivatives have been designated as
fair value hedges and are fully effective. The value of these swaps was $0.6
million at March 31, 2002, and was recorded as an asset with a corresponding
increase in long-term debt.
10. RECENT ACCOUNTING PRONOUNCEMENTS:
In July 2001, the FASB issued Statement No. 142, "Goodwill and Other Intangible
Assets" (SFAS 142). 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 adopted the standard effective
January 1, 2002 and expects to complete its first fair value-based impairment
tests by June 30, 2002. Any impairment charge resulting from these transitional
impairment tests will be reflected retroactively to the first quarter of 2002 as
a cumulative effect of a change in accounting principle. The Company has not yet
determined what the effects of these tests will be on the earnings and financial
position of the Company. A reconciliation of first quarter 2001 reported
earnings with pro forma earnings excluding goodwill amortization is shown on the
table below:
As Goodwill
(In millions, except per share amounts) Reported (Net of Tax) Pro Forma
- --------------------------------------- -------- ------------ ---------
Income from continuing operations $34.1 $4.4 $38.5
Income from continuing operations per share (diluted) $0.25 $0.03 $0.28
Net income $48.1 $6.2 $54.3
Net income per share (diluted) $0.35 $0.04 $0.39
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Results of Operations - (first quarter of 2002 compared to first quarter
of 2001)
Overview
For an understanding of the significant factors that influenced the Company's
results, the following discussion should be read in conjunction with the
consolidated financial statements and related notes.
Equifax Inc. is a leading source of consumer and commercial credit information
worldwide. The Company provides to a wide range of customers information
management, consumer credit information, marketing, business information, and
identity verification services to enable credit and business decisions. The
Company, through its Consumer Direct business, provides credit reporting and
identity theft monitoring services direct to consumers enabling them to
proactively manage their credit health and safeguard against identity theft. The
Company is the market leader for credit information services in North America.
In July 2001, the Company spun off its Payment Services industry segment
(Certegy) (Note 3) and, in October 2001, the Company sold its City Directory
business. The results of Certegy are reflected as discontinued operations in the
accompanying financial statements, and the results of the City Directory
business are reflected in "Divested Operations" for segment reporting.
In accordance with Statement of Financial Accounting Standards No. 142,
"Goodwill and Other Intangible Assets"(SFAS 142), the Company stopped amortizing
goodwill as of January 1, 2002 (Note 10).
Management believes the Equifax Core Business results, which exclude the 2001
results of Certegy and City Directory and also exclude 2001 goodwill
amortization, are more useful in analyzing the underlying business by providing
a consistent comparison of the Company's historical operating performance.
Financial highlights for the first quarter for Equifax's Core Business were:
- Consolidated revenues of $261 million declined four percent (two
percent after adjusting for exchange rate fluctuations).
- Operating income was $79 million compared to $75 million in 2001.
- Consolidated operating margins were 30 percent compared to 28 percent
in the prior year.
- Diluted earnings per share increased seven percent from $0.28 to
$0.30.
- North American revenues were $206 million and operating margins were
40 percent. Equifax's Consumer Direct revenues were $7.8 million,
nearly double the prior year.
- European revenues were $33 million with operating margins of 6.5
percent.
- Latin American revenues were $20 million and operating margins were 21
percent.
The following table summarizes Equifax's Core Business and As Reported results
from continuing operations for the three months ended March 31, 2002 and 2001:
Core Business As Reported
------------- -----------
(In millions, except per share amounts) 2002 2001 2002 2001
- --------------------------------------- ---- ---- ---- ----
Revenue $261.4 $272.5 $261.4 $285.2
Operating income $ 78.7 $ 75.4 $ 78.7 $ 70.3
Income from continuing operations $ 41.7 $ 37.9 $ 41.7 $ 34.1
Diluted earnings per share
from continuing operations $ 0.30 $ 0.28 $ 0.30 $ 0.25
11
A reconciliation of Equifax's first quarter As Reported earnings per share to
Core Business earnings per share is as follows:
Earnings Per Share (Diluted): 2002 2001
- ----------------------------- ---- ----
Continuing operations, As Reported $0.30 $0.25
Adjustments:
- Exclude 2001 goodwill amortization expense,
net of income taxes - 0.03
- Exclude City Directory results - -
----- -----
Continuing operations, Core Business $0.30 $0.28
===== =====
The following discussion of revenue, operating income and segment results is on
a Core Business basis (as previously described). The discussion of interest
expense and effective tax rates is on an As Reported basis.
Revenue
Revenue of $261.4 million declined four percent in the quarter due to
challenging global economic conditions and foreign currency fluctuations, mainly
in Latin America. Excluding the impact of exchange rate movements, revenue
declined two percent.
Operating Income
Operating income for the quarter was $78.7 million, an increase of four percent
over 2001. Exchange rate fluctuations negatively impacted the growth in
operating income by one percent. Operating margins improved to 30 percent in the
quarter compared to 28 percent in 2001 driven by a seven percent decline in
operating expenses due primarily to expense control initiatives throughout the
Company as well as cost savings resulting from the restructuring program
implemented in the fourth quarter of 2001.
Interest Expense
Interest expense decreased $2.8 million between periods due to lower average
debt outstanding and lower effective borrowing rates.
Effective Tax Rates
The effective tax rates from continuing operations were 40.0 percent in 2002 and
41.2 percent in 2001. The decline in 2002 was due to the elimination of goodwill
amortization beginning January 1, 2002, as required by SFAS 142.
Segment Results (Note 7)
North American Information Services
Revenue for the quarter in North American Information Services, which includes
U.S. Credit Information Services, Mortgage Services, Credit Marketing Services,
Direct Marketing Services, Canadian Operations and Consumer Direct, was
virtually flat versus the prior year due primarily to continued weakness in
marketing activity among our largest customers and a slowdown in volume growth
in U.S. credit reporting.
U.S. Credit Information Services' revenue was flat in the first quarter
following record volume growth in 2001. U.S. Credit reporting volumes increased
two percent over the prior year, while average prices declined two percent.
Canadian revenue increased two percent (six percent in local currency) and
Consumer Direct revenue nearly doubled to $7.8 million. Mortgage Services
revenues were up three percent as refinancing activity slowed.
Credit Marketing Services and Direct Marketing Services combined revenues of
$59.1 million were down seven percent from the prior year. Credit Marketing
revenues were up one percent in the quarter, while Direct Marketing revenues
declined 19 percent, impacted by continued weakness in customer marketing and
advertising activity.
12
Operating income for North American Information Services increased six percent
to $82.5 million due to cost management and improved profit performance in
Consumer Direct. Operating margins for this segment increased 200 basis points
to 40 percent compared to 38 percent in 2001.
Equifax Europe
Equifax Europe revenues of $33.1 million, which mainly consist of operations in
the United Kingdom, Spain, and Italy, declined five percent in local currency
due to challenging economic and competitive conditions.
Operating income more than tripled to $2.1 million in the quarter driven by
expense reductions and operating efficiencies. Operating margins were 6.5
percent compared to 1.8 percent in 2001.
Equifax Latin America
Equifax Latin America, which mainly includes operations in Brazil, Argentina and
Chile, generated revenues of $19.8 million in the first quarter compared to
$27.2 million in 2001. Excluding the impact of exchange rate fluctuations,
revenues were down 11 percent due primarily to the economic conditions in
Argentina.
Operating income was $4.1 million in 2002 versus $7.3 million in 2001. Reduced
profits in Argentina accounted for the decline in operating income between
periods. Latin American operating margins were 21 percent due to strong focus on
expense control and operating efficiency.
Other
Other consists solely of a subcontract related to the Company's lottery
subsidiary that expires in the second quarter of 2002. Revenue and operating
income for the first quarter remained comparable between periods.
Financial Condition
Cash provided by operating activities for the first quarter of 2002 totaled
$37.6 million compared with $30.0 million in 2001, and free cash flow (operating
cash flow less capital expenditures) doubled to $32.2 million in the first
quarter of 2002 compared to $16.0 million in 2001. Dividend payments and capital
expenditures, exclusive of acquisitions, were funded by operating cash flows.
Capital expenditures during the first quarter of 2002 totaled $5.4 million,
exclusive of acquisitions, and are expected to total approximately $50 million
for the full year. During the quarter, the Company repurchased 875,500 shares of
treasury stock at a total cost of $22.8 million, and also settled on December
2001 stock purchases totaling $7.3 million. At March 31, 2002, approximately
$272 million remained authorized for future repurchases. Other significant 2002
transactions included $22.5 million for acquisitions (Note 4).
Acquisitions and stock repurchases during the first quarter of 2002 were
financed primarily with excess cash from operations and proceeds from stock
option exercises. Borrowings net of debt repayments were insignificant in the
quarter. At March 31, 2002, approximately $363 million was available to the
Company under its $465 million revolving credit facility. There have been no
significant changes in the Company's contractual obligations since December 31,
2001. Should CSC exercise its option to sell its credit reporting business to
the Company, as discussed in Note 6, additional sources of financing would be
required. The Company believes it can arrange alternative sources of financing
to fund this potential purchase, including public debt markets and additional
lines of bank credit.
Off Balance Sheet Arrangement
Under the terms of its headquarters building operating lease, which commenced in
1999, the Company has guaranteed a portion of the residual value of the building
at the end of the lease in 2010. The maximum exposure under the guarantee is
approximately $23 million.
13
Critical Accounting Policies and Estimates
The Company's consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in the United States. The
preparation of these financial statements requires management to make estimates
and assumptions that affect: the reported amounts of assets and liabilities at
the date of the financial statements; the disclosure of contingent assets and
liabilities at the date of the financial statements; and the reported amounts of
revenues and expenses during the reporting period. Management regularly
evaluates its estimates and assumptions. These estimates and assumptions are
based on historical experience and on various other factors that are believed to
be reasonable under the circumstances, and form the basis for making judgments
about the carrying values of assets and liabilities that are not readily
apparent from other sources. Actual results may differ from these estimates
under different assumptions or conditions.
The Company's significant accounting policies are described in the Note 1 of
Notes to Consolidated Financial Statements in the Company's annual report on
Form 10-K for the year ended December 31, 2001. Management believes that the
following accounting policies involve a higher degree of complexity and warrant
specific description:
Valuation of Long-Lived Assets
The Company regularly evaluates whether events or circumstances have occurred
which indicate that the carrying amounts of long-lived assets (principally
goodwill, purchased data files, systems development and other deferred costs,
and investments in unconsolidated subsidiaries) may be impaired or not
recoverable. The significant factors that are considered that could trigger an
impairment review include: changes in business strategy, market conditions, or
the manner of use of an asset; underperformance relative to historical or
expected future operating results; and negative industry or economic trends. In
evaluating an asset for possible impairment, management estimates that asset's
future undiscounted cash flows to measure whether the asset is recoverable. If
it is determined that the asset is not recoverable, the Company measures the
impairment based on the projected discounted cash flows of the asset over its
remaining life. While the Company believes that its estimates of future cash
flows are reasonable, different assumptions regarding such cash flows could
materially affect these evaluations. In 2001, the FASB issued Statement No. 142,
"Goodwill and Other Intangible Assets," which among other things, eliminates the
amortization of goodwill and certain other intangible assets and requires that
goodwill be evaluated annually for impairment by applying a fair value-based
test. The Company adopted the standard effective January 1, 2002 for
acquisitions prior to June 30, 2001, and, in accordance with the standard, will
complete its first fair value-based impairment tests by June 30, 2002.
Deferred Tax Assets
The Company estimates levels of future taxable income and utilizes prudent and
feasible tax planning strategies in establishing and maintaining deferred tax
assets. If the Company is unable to realize all or part of its deferred tax
assets in the future, the Company's effective tax rate could increase.
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, 2001.
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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 changes in 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 translational
foreign currency exchange risks. However, the Company does hedge material
transactional foreign currency exchange risks, and at March 31, 2002, the
exchange risks associated with the Company's intercompany advances to its U.K.
operations, as well as the intercompany balances associated with funding its
Italy acquisition were hedged by having a portion of the borrowings under its
revolving credit facility denominated in those respective currencies.
The Company manages its exposure to changes in interest rates by (1) maintaining
an appropriate weighted average debt maturity and (2) controlling the mix of
fixed and variable rate debt, in part by using interest rate swap agreements.
The Company's earnings can be affected by the impact that changes in interest
rates have on its variable-rate obligations. At March 31, 2002, approximately
$356 million (47%) 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 $3.6 million per year (pre-tax).
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PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON 8-K
(a) Exhibits
No exhibits are included as part of this report.
(b) Reports on Form 8-K
None have been filed during the quarter for which this report is
filed.
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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: May 15, 2002 /s/ Thomas F. Chapman
-----------------------------
Thomas F. Chapman, Chairman
and Chief Executive Officer
Date: May 15, 2002 /s/ Philip J. Mazzilli
-----------------------------
Philip J. Mazzilli
Chief Financial Officer
17