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, 1996
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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.)
1600 Peachtree Street, N.W. Atlanta, Georgia
P.O. Box 4081, Atlanta, Georgia 30302
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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, 1996
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Common Stock, $1.25 Par Value 151,915,692
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INDEX
Page No.
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Part I. Financial Information
Consolidated Balance Sheets --
June 30, 1996 and December 31, 1995 2 - 3
Consolidated Statements of Income --
Three Months Ended June 30, 1996 and 1995 4
Consolidated Statements of Income --
Six Months Ended June 30, 1996 and 1995 5
Consolidated Statement of Shareholders'
Equity -- Six Months Ended June 30, 1996 6
Consolidated Statements of Cash Flows --
Six Months Ended June 30, 1996 and 1995 7
Notes to Consolidated Financial
Statements 8 - 10
Management's Discussion and Analysis
of Results of Operations and
Financial Condition 11 - 14
Review by Independent Public Accountants 14
Review Report by Independent Public Accountants 15
Part II. Other Information 16 - 18
Exhibit Index 19
Consent Letter Covering Review by Independent
Public Accountants 20
-1-
PART I. FINANCIAL INFORMATION
--------------------------------
CONSOLIDATED BALANCE SHEETS JUNE DECEMBER
30, 31,
(In thousands) 1996 1995
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(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents.............................$ 53,615 $ 26,136
Accounts receivable................................... 274,626 258,335
Deferred income tax assets............................ 25,519 30,594
Other current assets.................................. 40,415 51,611
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Total current assets................................. 394,175 366,676
---------- ----------
PROPERTY AND EQUIPMENT:
Land, buildings and improvements...................... 19,085 18,050
Data processing equipment and furniture............... 243,596 218,699
---------- ----------
262,681 236,749
Less-Accumulated depreciation......................... 163,592 148,901
---------- ----------
99,089 87,848
---------- ----------
GOODWILL.............................................. 360,392 353,571
---------- ----------
PURCHASED DATA FILES.................................. 72,590 74,828
---------- ----------
OTHER................................................. 173,456 170,772
---------- ----------
$1,099,702 $1,053,695
========== ==========
The notes on pages 8 through 10 are an integral part of these balance sheets.
-2-
CONSOLIDATED BALANCE SHEETS JUNE DECEMBER
30, 31,
(In thousands, except par value) 1996 1995
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(Unaudited)
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term debt and current maturities................$ 44,978 $ 20,384
Accounts payable...................................... 73,539 62,194
Accrued salaries and bonuses.......................... 23,525 27,919
Income taxes payable.................................. 3,448 --
Other current liabilities............................. 142,301 140,123
---------- ----------
Total current liabilities........................... 287,791 250,620
---------- ----------
LONG-TERM DEBT, LESS CURRENT MATURITIES............... 266,532 302,665
---------- ----------
POSTRETIREMENT BENEFIT OBLIGATION..................... 80,158 80,885
---------- ----------
LONG-TERM DEFERRED REVENUE............................ 48,182 --
---------- ----------
OTHER LONG-TERM LIABILITIES........................... 64,772 66,103
---------- ----------
COMMITMENTS AND CONTINGENCIES (Note 5)
SHAREHOLDERS' EQUITY:
Common stock, $1.25 par value; shares
authorized - 300,000; issued - 170,214 in 1996
and 168,812 in 1995; outstanding - 145,361
in 1996 and 147,245 in 1995......................... 212,767 211,015
Preferred stock, $0.01 par value; shares
authorized - 10,000; issued and outstanding -
none in 1996 or 1995................................ -- --
Paid-in capital....................................... 190,648 171,020
Retained earnings..................................... 322,580 269,986
Cumulative foreign currency translation
adjustment.......................................... (13,887) (13,777)
Treasury stock, at cost, 18,298 shares in 1996
and 14,847 shares in 1995........................... (295,257) (218,613)
Stock held by employee benefits trusts, at cost,
6,554 shares in 1996 and 6,719 shares in 1995... (64,584) (66,209)
---------- ----------
Total shareholders' equity.......................... 352,267 353,422
---------- ----------
$1,099,702 $1,053,695
========== ==========
The notes on pages 8 through 10 are an integral part of these balance sheets.
-3-
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
THREE MONTHS ENDED
JUNE 30,
(In thousands, except per share amounts) 1996 1995
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Operating revenue..................................... $ 445,615 $ 407,406
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Costs and expenses:
Costs of services..................................... 277,710 262,810
Selling, general and administrative expenses.......... 92,949 81,078
Asset impairment (Note 9)............................. 10,313 --
--------- ---------
Total operating expenses............................. 380,972 343,888
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Operating income...................................... 64,643 63,518
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Other income, net..................................... 8,781 1,990
Interest expense...................................... (5,181) (4,922)
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Income before income taxes............................ 68,243 60,586
Provision for income taxes............................ 27,113 24,772
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Net income............................................ $ 41,130 $ 35,814
========= =========
Weighted average common shares outstanding............ 145,923 152,974
========= =========
Per common share:
Net income.......................................... $ 0.28 $ 0.23
========= =========
Dividends............................................. $ 0.083 $ 0.078
========= =========
The notes on pages 8 through 10 are an integral part of these statements.
-4-
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
SIX MONTHS ENDED
JUNE 30,
(In thousands, except per share amounts) 1996 1995
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Operating revenue..................................... $ 868,626 $ 791,599
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Costs and expenses:
Costs of services..................................... 548,080 514,933
Selling, general and administrative expenses.......... 179,666 159,913
Asset impairment (Note 9)............................. 10,313 --
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Total operating expenses............................. 738,059 674,846
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Operating income...................................... 130,567 116,753
Other income, net..................................... 9,229 4,246
Interest expense...................................... (10,420) (9,921)
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Income before income taxes............................ 129,376 111,078
Provision for income taxes............................ 51,401 45,792
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Net income............................................ $ 77,975 $ 65,286
========= =========
Weighted average common shares outstanding............ 146,296 152,650
========= =========
Per common share:
Net income.......................................... $ 0.53 $ 0.43
========= =========
Dividends........................................... $ 0.165 $ 0.155
========= =========
The notes on pages 8 through 10 are an integral part of these statements.
-5-
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (UNAUDITED)
SIX MONTHS ENDED
(In thousands) JUNE 30, 1996
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COMMON STOCK:
Balance at beginning of period................................... $ 211,015
Shares issued under stock plans.................................. 1,752
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Balance at end of period......................................... $ 212,767
==========
PAID-IN CAPITAL:
Balance at beginning of period................................... $ 171,020
Shares issued under stock plans.................................. 18,162
Other............................................................ 1,466
----------
Balance at end of period......................................... $ 190,648
==========
RETAINED EARNINGS:
Balance at beginning of period................................... $ 269,986
Net income....................................................... 77,975
Cash dividends paid.............................................. (25,381)
----------
Balance at end of period......................................... $ 322,580
==========
CUMULATIVE FOREIGN CURRENCY TRANSLATION ADJUSTMENT:
Balance at beginning of period................................... $ (13,777)
Adjustment during period......................................... (110)
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Balance at end of period......................................... $ (13,887)
==========
TREASURY STOCK:
Balance at beginning of period................................... $ (218,613)
Cost of shares repurchased....................................... (77,259)
Cost of shares reissued for prior year acquisition............... 615
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Balance at end of period......................................... $ (295,257)
==========
STOCK HELD BY EMPLOYEE BENEFITS TRUSTS:
Balance at beginning of period................................... $ (66,209)
Cost of shares reissued under stock plans........................ 1,625
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Balance at end of period......................................... $ (64,584)
==========
The notes on pages 8 through 10 are an integral part of this statement.
-6-
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) SIX MONTHS ENDED
JUNE 30,
(In thousands) 1996 1995
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.......................................... $ 77,975 $ 65,286
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization..................... 40,359 37,923
Asset impairment (Note 9)......................... 10,313 --
Gain on sale of long-term investment.............. (8,232) --
Changes in assets and liabilities:
Accounts receivable, net........................ (14,435) (1,813)
Current liabilities, excluding debt............. 9,613 (40,153)
Other current assets............................ 11,650 (8,952)
Deferred income taxes........................... (1,767) (1,766)
Other long-term liabilities, excluding debt. 52,121 (3,001)
Other assets.................................... (4,820) --
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Net cash provided by operating activities........... 172,777 47,524
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CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment................. (24,948) (14,560)
Additions to other assets, net...................... (14,533) (17,622)
Acquisitions, net of cash acquired.................. (26,833) (11,914)
Deferred payments on prior year acquisitions........ -- (8,743)
Proceeds from sale of long-term investment.......... 18,356 --
--------- ---------
Net cash used by investing activities (47,958) (52,839)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Net short-term borrowings........................... 24,071 (16,599)
Net long-term borrowings............................ (37,963) 30,863
Dividends paid...................................... (25,381) (24,724)
Treasury stock purchases............................ (77,259) (10,168)
Proceeds from exercise of stock options............. 17,985 8,826
Other............................................... 1,081 1,042
--------- ---------
Net cash used by financing activities (97,466) (10,760)
--------- ---------
Effect of foreign currency exchange rates on cash. 126 1,135
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Net cash provided..................................... 27,479 (14,940)
Cash at beginning of period........................... 26,136 79,409
--------- ---------
Cash at end of period................................. $ 53,615 $ 64,469
========= =========
The notes on pages 8 through 10 are an integral part of these statements.
-7-
EQUIFAX INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 1996
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 statement of the financial position of the
Company as of June 30, 1996 and the results of operations for the three and six
months ended June 30, 1996 and 1995 and the cash flows for the six months ended
June 30, 1996 and 1995. 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 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, 1995.
2. NATURE OF OPERATIONS:
The Company principally provides information services to businesses that help
them grant credit, authorize and process credit card and check transactions,
insure lives and property, and manage and control healthcare costs. The
principal lines of business are credit services, payment services, insurance
services, and healthcare information services. The principal markets for credit
and payment services are retailers, banks and financial institutions, while
those for insurance services are life and health and property and casualty
insurance companies. The principal markets for healthcare information services
are healthcare providers, payers, and managed care organizations. The Company's
operations are predominately located within the United States.
3. USE OF ESTIMATES:
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions.
These estimates and assumptions affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements as well as reported amounts of revenues and expenses
during the reporting period. Actual results could differ from these estimates.
4. SHAREHOLDERS' EQUITY:
COMMON AND PREFERRED STOCK. In May 1996, the Company's shareholders approved a
Board of Directors resolution which increased the authorized Common Stock of the
Company from 250 million to 300 million shares. The shareholders also approved
another Board of Directors resolution to authorize 10 million shares of "blank
check" preferred stock.
TREASURY STOCK. During the first six months of 1996, the Company repurchased
approximately 3,489,000 of its common shares through open market transactions at
an aggregate cost of $77,259,000 and also reissued approximately 38,000 treasury
shares in connection with the final payment for a 1994 acquisition.
STOCK HELD BY EMPLOYEE BENEFITS TRUSTS. During the first quarter of 1996, the
Company reissued approximately 165,000 shares of stock held by an employee
benefits trust, with the shares used for stock option exercises and performance
share plan awards.
8
5. AGREEMENT WITH COMPUTER SCIENCES CORPORATION:
The Company has an agreement with Computer Sciences Corporation (CSC) under
which CSC-owned credit bureaus and certain CSC affiliate bureaus utilize the
Company's credit database service. CSC and these affiliates retain ownership of
their respective credit files and the revenues generated by their credit
reporting activity. The Company receives a processing fee for maintaining the
database and for each report supplied. The agreement expires in 1998, is
renewable at the option of CSC for successive ten-year periods, and provides CSC
with an option to sell its collection and credit reporting businesses to the
Company. The option is currently exercisable and expires in 2013. In the event
CSC does not exercise its option to sell and does not renew the agreement, or if
there is a change in control of CSC, the Company has the option to purchase
CSC's collection and credit reporting businesses. The option price is
determined, for all purposes, in accordance with the following schedule: on or
before July 31,1998, at the price determined by certain financial formulas; and
after July 31, 1998, at appraised value. The Company currently estimates the
option price determined by the financial formulas to be approximately $400
million. In its annual report for the fiscal year ended March 29, 1996, CSC
stated that the option price "approached $500 million at March 29, 1996."
6. LOTTERY CONTRACT DISPUTE, LITIGATION, AND SETTLEMENT:
High Integrity Systems, Inc. (HISI), a Company subsidiary, entered into a
contract in July 1992 to provide lottery services to the state of California,
whereby HISI agreed to provide a system to automate the processing of instant
lottery tickets and a system to sell on-line game tickets through 10,000 low-
volume terminals.
On April 26, 1993, the California State Lottery (CSL) filed suit against HISI in
Superior Court, Sacramento County, California, with said complaint amended May
7, 1993 naming Equifax Inc., et al. and Federal Insurance Company as additional
defendants. The CSL sought unspecified damages for alleged breach of contract
and injunctive relief. On May 7, 1993, HISI filed a cross-complaint against the
CSL seeking compensatory and general damages in an amount not less than $65
million and special and consequential damages in an amount not less than $100
million alleging breach of contract and seeking recovery of the reasonable value
of the labor and materials expended on behalf of the CSL based on the theory of
quantum meruit and unjust enrichment.
In September 1993, the Company recorded a provision of $48,438,000 ($30,939,000
after tax, or $.21 per share) related to the lottery contract to write down data
processing equipment and other assets to their estimated net realizable value
and to accrue for estimated costs related to litigation with the CSL.
On July 14, 1995, the CSL and HISI jointly announced a renewed business
agreement which allowed the litigation between the parties to be settled pending
execution of the terms of the contract. On November 9, 1995, the CSL and HISI
finalized the terms of the reinstated contract. The final settlement was
approved by the trial court on December 19, 1995, and provides that the CSL and
HISI shall file dismissals with prejudice of their respective claims no later
than 365 days following the trial court's approval.
The settlement provides for a reinstated contract whereby HISI will install its
system to automate the processing of instant lottery tickets, with the CSL
purchasing 6,700 terminals, related security hardware and licensing various
software applications developed to support the system from HISI for $25,000,000.
In the fourth quarter of 1995, the Company recorded a credit of $19,665,000
($11,996,000 after tax, or $.08 per share) to reflect the financial impact of
this settlement net of related legal expenses and additional costs to be
incurred by the Company to complete the system software and install the
terminals. Under the reinstated contract, HISI will initially install a minimum
of 6,000 terminals with HISI retaining an option to install up to 4,000
additional terminal locations, with CSL approval. HISI is also guaranteed to
receive 66 months of revenue for each of the 6,000 terminals at the rate of 5%
on each dollar of lottery ticket sales occurring from each terminal. If HISI
completes the system and acceptance testing within specified dates, an incentive
payment of up to $4,000,000 may be earned. HISI and the CSL have established an
oversight committee and engaged an independent technical advisor who will
consult in the design and implementation of acceptance testing and start-up
activities.
9
On February 6, 1996, HISI and GTECH Corporation (GTECH) entered into an
agreement whereby HISI subcontracted many of its obligations under the
reinstated contract to GTECH. This subcontract provides for a one-time payment
of $58,000,000 by GTECH to HISI, and also provides that future payments received
by HISI from the CSL for lottery ticket sales and incentives earned be paid to
GTECH. The Company received the $58,000,000 from GTECH and recognized $5,000,000
in revenue related to the subcontract in the first quarter, 1996. The current
portion of the remaining $53,000,000 balance is included in other current
liabilities, and the non-current portion is recorded as long-term deferred
revenue. The $53,000,000 balance will be recognized as revenue over the term of
the reinstated CSL contract, net of related expenses.
7. ACQUISITIONS:
During the first six months of 1996, the Company acquired substantially all the
assets and business operations of four companies and also acquired the remaining
49.9% interest of Transax plc in the United Kingdom. These acquisitions were
accounted for as purchases, and had an aggregate purchase price of $29.5
million, with approximately $17.9 million allocated to goodwill and $7.1 million
to other assets (primarily software). Their results of operations have been
included in the consolidated statement of income from the date of acquisition
and were not material to the results of operation of the Company.
8. RESTRUCTURING:
In the fourth quarter of 1995, the Company initiated a restructuring program
designed to streamline operations by reducing staffing levels and consolidating
facilities. Staffing levels were reduced by approximately 750 employees
primarily in the Insurance Services, General Information Services, and Credit
Services Segments. The total cost of this program was $19,572,000 ($11,939,000
net of tax, or $.08 per share). Components of the restructuring provision and
utilization through June 30, 1996 are as follows:
Severance and
Termination Asset Lease
(In Thousands) Benefits Write-Offs Costs Total
- -------------- ------------- ---------- ------ --------
Original provision $13,813 $ 2,994 $2,765 $19,572
Utilized in 1995 (2,521) (2,994) (915) (6,430)
------- --------- ------ -------
Balance, December 31, 1995 11,292 -- 1,850 13,142
Utilized in 1996 (6,215) -- (901) (7,116)
------- --------- ------ -------
Balance, June 30, 1996 $ 5,077 $ -- $ 949 $ 6,026
======= ========= ====== =======
The reserve balance at June 30, 1996 is included in other current liabilities in
the accompanying balance sheets.
9. ASSET IMPAIRMENT:
In accordance with the Financial Accounting Standards Board Statement No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of", in June 1996, the Company recorded a loss of $10,313,000 to
write off certain intangible assets in the Healthcare Administrative Services
business unit in its General Information Services segment.
This business unit provides back-room functions such as claims administration,
analytical services, and cost review primarily for employer based self-insured
health plans. The loss resulted from declining revenues caused by healthcare
enrollment patterns, which have continued to shift from indemnity type plans to
health-maintenance type plans thereby reducing the self-insured administration
market. The loss was determined from analysis using both projected future cash
flows and an independent appraisal.
10
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
Results of Operations - (second quarter and first six months of 1996 compared to
the second quarter and first six months of 1995)
Revenue for the second quarter and first six months increased 9% and 10%
respectively over the comparable periods of 1995. Excluding the effects of
acquisitions and 1995 divestitures, revenue increased 11% in both periods.
Operating income increased 2% in the second quarter and 12% year-to-date.
Excluding a $10.3 million write-off related to asset impairments in the General
Information Services segment (Note 9), operating income improved 18% and 21%
respectively over the prior year periods. These increases resulted primarily
from revenue growth in higher margin business units, improvement in the
International Operations segment, and the recognition of revenue from a lottery
subcontract (Note 6).
Net income and earnings per share increased 15% and 22% respectively in the
second quarter and 19% and 23% year-to-date, with higher earnings per share
increases relative to net income increases a reflection of the Company's
continuing repurchases of common shares.
In the fourth quarter of 1995, the Company changed its segment reporting
structure by moving its Equifax National Decision Systems business unit from the
General Information Services segment to the Credit Services segment. Second
quarter and first six months 1995 information has been restated to conform with
the new presentation. Operating revenue and operating income by industry segment
for the second quarter and first six months of 1996 and 1995 are as follows (in
thousands):
Second Quarter Six Months
-------------------- ----------------------
Operating Revenue: 1996 1995 1996 1995
- ------------------ --------- --------- --------- -----------
Credit Services $146,950 $125,682 $285,640 $245,002
Payment Services 79,252 68,831 150,850 129,709
Insurance Services 144,958 132,439 280,713 259,538
International Operations 57,796 50,199 112,442 99,131
General Information Services 16,659 30,255 38,981 58,219
-------- -------- -------- --------
$445,615 $407,406 $868,626 $791,599
======== ======== ======== ========
Operating Income (Loss):
- ------------------------
Credit Services $ 51,288 $ 42,123 $ 98,827 $ 82,738
Payment Services 14,414 15,660 26,229 26,663
Insurance Services 13,116 11,141 22,974 20,699
International Operations 7,901 4,507 11,913 6,787
General Information Services (10,586) (2,275) (7,377) (3,756)
-------- -------- -------- --------
Operating Contribution 76,133 71,156 152,566 133,131
General Corporate Expense (11,490) (7,638) (21,999) (16,378)
-------- -------- -------- --------
$ 64,643 $ 63,518 $130,567 $116,753
======== ======== ======== ========
The following discussion analyzes operating results by industry segment, general
corporate expense, and consolidated other income and effective income tax rates.
11
Credit Services
- ---------------
Revenue in Credit Services, which includes Credit Reporting Services, Mortgage
Information Services, Risk Management Services, and Equifax National Decision
Systems, increased 17% in both the second quarter and first six months, with two
percentage points of these increases attributable to acquisitions. Credit
Reporting Services revenue, excluding acquisitions, was up 15% in the quarter
and 13% year-to-date driven by increased prescreening business for credit card
issuers and volume growth in the finance, automotive, mortgage, banking and
utilities industries. Average prices continue to decline, but at a lower rate
than in 1995. This decline, however, was more than offset by continued volume
growth. Revenue in Mortgage Information Services, which was up 5% year-to-date
exclusive of a 1995 acquisition, declined 11% in the second quarter as mortgage
lending activity slowed due to increased interest rates. Risk Management
Services revenue was up 18% in the quarter and 23% year-to-date, due primarily
to new business from customers outsourcing the accounts receivable management
function of their businesses, while revenue in Equifax National Decision Systems
increased 34% in the quarter and 20% year-to-date.
Operating income increased 22% in the quarter and 19% in the first six months
due primarily to the revenue growth within Credit Reporting Services and Risk
Management Services.
Payment Services
- ----------------
Revenue in Payment Services, which includes Check Services, Card Services, and
FBS Software, increased 15% in the quarter and 16% in the first six months. Card
Services revenue increased 23% in both periods driven by volume increases
resulting from growth in the cardholder account base and increased processing of
merchant transactions. Check Services revenue was up 2% in the quarter and 3%
year-to-date, with a 3% decline in check guarantee revenue in both periods
offset by increases in other Check Services products. FBS Software revenue
improved $2.3 million in the quarter and $5.1 million year-to-date due primarily
to several large consulting projects which began in the fourth quarter of 1995
and the second quarter of 1996.
Operating income declined 8% in the quarter due to one-time expenses that are
being incurred in connection with a major move to a new location in the Tampa
area. Excluding these expenses, second quarter operating income for Payment
Services was about even with the prior year as operating income growth within
Card Services was offset by a decline in Check Services resulting primarily from
higher selling and customer service and support expenses. Payment Services
operating income for the first six months declined 2% over the comparable period
in 1995.
Insurance Services
- ------------------
Second quarter and year-to-date revenue increased 9% and 8% respectively, with
motor vehicle registry (the fee charged by states for their records which the
Company passes on to its customers) accounting for five percentage points of
each period's increase. The balance of the increases were due to improvements in
Data Services (up 16% in the quarter and 14% year-to-date), Osborn Laboratories
(up 33% in the quarter and 30% year-to-date) and CUE U.K. (up 109% in both
periods). The revenue increases in Data Services and Osborn Laboratories
resulted primarily from volume increases, while the CUE U.K. increases resulted
from the late 1995 roll-out of the CUE Motor product and increased usage of the
CUE Home product. A 5% increase in Field Services second quarter revenue was
offset by a decline in Commercial Specialists.
Operating income improved 18% in the second quarter and 11% year-to-date, due
primarily to gains in Data Services and CUE U.K. which were partially offset by
declines in Commercial Specialists.
12
International Operations
- ------------------------
International Operations revenue, adjusted for noncomparables (acquisitions and
the second quarter 1995 sale of the Canadian field services insurance products
business), increased 4% in the second quarter and 5% in the first six months. In
local currencies, excluding noncomparables, second quarter and year-to-date
revenue increased 5% and 4% respectively in Canada and 9% in both periods in
Europe, with gains in most product lines.
Second quarter operating income increased $3.4 million, with Canada up $.9
million, Europe improving by $1.9 million, and South American joint ventures up
$.7 million. Year-to-date operating income was up $5.1 million with increases of
$1.3 million in Canada, $2.9 million in Europe and $1.1 million in South
America. Within Europe, operating leverage resulting from the integration of the
1994 Infolink acquisition was partially offset by higher costs associated with
the third quarter 1995 Infocheck acquisition, which is currently being
integrated into the European Operations.
General Information Services
- ----------------------------
After adjusting to exclude the effects of the third quarter 1995 divestitures
of Elrick & Lavidge and Quick Test, second quarter revenue declined $.3 million
while year-to-date revenue increased $6.1 million. The $.3 million decline in
the quarter was attributable to reduced revenue within Healthcare Information
Services while the year-to-date increase was due to HISI's recognition of $5.0
million from its lottery subcontract with GTECH in the first quarter of 1996
(Note 6) and a one-time revenue item recorded within Healthcare during the first
quarter.
This segment's operating loss increased $8.3 million in the second quarter due
to the recording of a $10.3 million asset impairment loss within Healthcare
Information Services (Note 9) which was partially offset by a non-recurring
second quarter gain of $2.3 million related to a settlement with HISI's
insurance carrier. The $3.6 million year-to-date increase in this segment's
operating loss is due to the aforementioned items and also reflects the $5.0
million HISI revenue recorded in the first quarter of 1996.
General Corporate Expense
- -------------------------
General corporate expense increased $3.9 million in the second quarter and $5.6
million year-to-date due primarily to higher performance share plan and
incentive accruals and expenses for projects related to system enhancements.
Other Income and Effective Income Tax Rates
- -------------------------------------------
Other income increased $6.8 million in the second quarter and $5.0 million year-
to-date. These gains are primarily the result of an $8.2 million gain recorded
on the sale of the Company's 1995 investment in Physician Computer Network, Inc.
This gain was partially offset by lower levels of interest income and certain
other nonrecurring items recorded in 1996.
The second quarter and year-to-date effective income tax rates declined to 39.7%
from 40.9% in the second quarter 1995 and from 41.2% in the first six months of
1995. The declines were due in large part to a change in the mix of foreign
income between tax jurisdictions with different effective tax rates.
13
FINANCIAL CONDITION
The Company's financial condition remained strong during the first six months of
1996. Net cash provided by operations increased from $47.5 million to $172.8
million primarily due to the receipt of $58.0 million related to the lottery
subcontract (Note 6), reduced disbursements for income taxes due to the timing
of payments between quarters, and a reduction in disbursements for salaries and
bonuses and other current liabilities between years. Normal capital expenditures
and dividend payments were met with these internally generated funds.
Other significant outlays in the first six months included $77.3 million of
treasury stock purchases (Note 4), $26.8 million for acquisitions (Note 7), and
$38.0 million in long-term debt repayments. These items were principally
financed by excess cash from operations.
Capital expenditures for the remainder of 1996 are currently projected to be
approximately $58 million, exclusive of acquisitions. Additional expenditures
are possible as opportunities arise. As of June 30, 1996, approximately $80
million remains authorized under the Company's share repurchase program, and
purchases have continued in the third quarter.
The remaining 1996 capital expenditures should be met with internally generated
funds. At June 30, 1996, $530 million was available under the Company's $550
million revolving credit facility to fund future capital requirements, including
the possible purchase of the CSC collections and credit reporting businesses
(Note 5). Management feels that the Company's liquidity will remain strong in
both the short-term and long-term, and that the Company has sufficient debt
capacity to finance all of these requirements, if necessary.
Limited Review By
Independent Public Accountants
Arthur Andersen LLP, independent public accountants, has performed a limited
review of the interim financial information contained herein in accordance with
established professional standards and procedures for such a review. Attached
hereto is a review report from Arthur Andersen LLP covering its limited review
of the interim financial information contained herein.
14
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders of Equifax Inc.:
We have reviewed the accompanying interim consolidated balance sheet of EQUIFAX
INC. (a Georgia corporation) AND SUBSIDIARIES as of June 30, 1996 and the
related interim consolidated statements of income for the six-month and three-
month periods ended June 30, 1996 and 1995, shareholders' equity for the six-
month period ended June 30, 1996, and cash flows for the six-month periods ended
June 30, 1996 and 1995. These financial statements are the responsibility of
the Company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in
accordance with generally accepted auditing standards, the objective of which is
the expression of an opinion regarding the financial statements taken as a
whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the financial statements referred to above for them to be in
conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the accompanying consolidated balance sheet of Equifax Inc. and
subsidiaries as of December 31, 1995, and in our report dated February 16, 1996,
we expressed an unqualified opinion on that statement.
/s/Arthur Andersen LLP
Atlanta, Georgia
August 13, 1996
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PART II. OTHER INFORMATION
---------------------------
Item 1. Legal Proceedings
- ------- -----------------
On April 26, 1993, the California State Lottery filed suit against High
Integrity Systems, Inc., a Company subsidiary, in the Superior Court of the
State of California, Sacramento County.
Reference is made to information reported in Note 6 of the Notes to Consolidated
Financial Statements, included in Part I of this report.
Item 4. Submission of Matters to a Vote of Security Holders
- ------- ---------------------------------------------------
(a) On May 1, 1996, the Company held its regular annual meeting of
Shareholders.
(b) Below is a brief description of each matter voted upon at said meeting,
each more fully described in that Definitive Proxy Statement, dated March
28, 1996, as filed with the Commission on March 27, 1996, along with the
respective vote tabulations:
(i) Election of six Directors, one to serve a term of one year and five
each to serve a term of three years: One year term - Derek V. Smith
(131,827,278 votes "for" and 1,807,475 votes withheld); Directors
with three year terms - Thomas F. Chapman (131,779,644 votes "for"
and 1,855,109 votes withheld); Robert P. Forrestal (131,901,817
votes "for" and 1,732,936 votes withheld); Tinsley H. Irvin
(131,955,848 votes "for" and 1,678,905 votes withheld); D. Raymond
Riddle (131,866,673 votes "for" and 1,768,080 votes withheld); and
Betty L. Siegel, Ph.D. (131,787,904 votes "for" and 1,846,849 votes
withheld). The names of each other Director whose term of office as
a Director continued after this meeting are as follows: D. W.
McGlaughlin; Larry L. Prince; C. B. Rogers, Jr.; L. W. Sullivan,
M.D.; Lee A. Ault, III; Ron D. Barbaro; John L. Clendenin; A. W.
Dahlberg; and L. Phillip Humann.
(ii) Approval of the Amended Equifax Inc. 1988 Performance Share Plan for
Officers (116,225,157 votes "for"; 14,815,299 votes "against";
2,453,749 abstentions; and 140,548 broker non-votes).
(iii) Approval of Amended Articles of Incorporation to Increase Authorized
Common Stock (124,955,378 votes "for"; 6,825,142 votes "against";
1,756,613 abstentions; and 97,620 broker non-votes).
(iv) Approval of Amended Articles of Incorporation to Authorize "Blank
Check" Preferred Stock (81,112,559 votes "for"; 34,502,901 votes
"against"; 3,004,688 abstentions; and 15,014,605 broker non-votes).
- 16 -
(v) Approval of Amended Articles of Incorporated to Adopt the Minimum
Shareholder Vote Required Under Current State of Georgia Law
(112,607,441 votes "for"; 4,428,056 votes "against"; 1,608,310
abstentions; and 14,990,946 broker non-votes).
(vi) Approval of Amended and Restated Articles of Incorporation to
Modernize and Conform to Current State of Georgia Law (127,358,866
votes "for"; 4,131,564 votes "against"; 1,361,293 abstentions; and
783,030 broker non-votes).
(vii) Approval of Appointment of Arthur Andersen LLP as independent public
accountants of the Company for the year 1996 (131,628,058 votes
"for"; 625,233 votes "against"; 1,283,562 abstentions; and 97,900
broker non-votes).
Item 5. Other Information
- ------- -----------------
Reference is made to information reported in Notes 1, 2, 3, 4, 7, 8 and 9 of the
Notes to Consolidated Financial Statements, included in Part I of this report.
Item 6. Exhibits and Reports on Form 8-K
- ------- --------------------------------
(a) Exhibits
15 Letter from Arthur Andersen LLP, dated August 13, 1996.
(b) Reports on Form 8-K
Registrant did not file any reports on Form 8-K during the quarter for
which this report is filed.
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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 thereunto duly authorized.
EQUIFAX INC.
------------
(Registrant)
Date: August 13, 1996 /s/D. W. McGlaughlin
----------------------------
D. W. McGlaughlin, President
and Chief Executive Officer
Date: August 13, 1996 /s/P. J. Mazzilli
----------------------------
P. J. Mazzilli
Corporate Vice President
and Controller
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EXHIBIT INDEX
-------------
Exhibit Description of Exhibit
- ------- ----------------------
15 Arthur Andersen LLP
Letter dated August 13, 1996
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