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, 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
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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, 1996
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Common Stock, $1.25 Par Value 151,080,023
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INDEX
Page No.
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Part I. Financial Information
Consolidated Balance Sheets --
September 30, 1996 and December 31, 1995 2 - 3
Consolidated Statements of Income --
Three Months Ended September 30, 1996 and 1995 4
Consolidated Statements of Income --
Nine Months Ended September 30, 1996 and 1995 5
Consolidated Statement of Shareholders'
Equity -- Nine Months Ended September 30, 1996 6
Consolidated Statements of Cash Flows --
Nine Months Ended September 30, 1996 and 1995 7
Notes to Consolidated Financial
Statements 8 - 11
Management's Discussion and Analysis
of Results of Operations and
Financial Condition 12 - 15
Review by Independent Public Accountants 15
Review Report by Independent Public Accountants 16
Part II. Other Information 17 - 18
Exhibit Index 19
Consent Letter Covering Review by Independent
Public Accountants 20
-1-
PART I. FINANCIAL INFORMATION
--------------------------------
CONSOLIDATED BALANCE SHEETS SEPTEMBER DECEMBER
30, 31,
(In thousands) 1996 1995
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(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents.............................$ 57,614 $ 26,136
Accounts receivable................................... 281,665 258,335
Deferred income tax assets............................ 25,760 30,594
Other current assets.................................. 48,800 51,611
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Total current assets................................. 413,839 366,676
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PROPERTY AND EQUIPMENT:
Land, buildings and improvements...................... 23,933 18,050
Data processing equipment and furniture............... 269,421 218,699
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293,354 236,749
Less-Accumulated depreciation......................... 173,236 148,901
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120,118 87,848
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GOODWILL.............................................. 419,970 353,571
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PURCHASED DATA FILES.................................. 85,277 74,828
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OTHER................................................. 214,722 170,772
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$1,253,926 $1,053,695
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The notes on pages 8 through 11 are an integral part of these balance sheets.
-2-
CONSOLIDATED BALANCE SHEETS SEPTEMBER DECEMBER
30, 31,
(In thousands, except par value) 1996 1995
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(Unaudited)
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term debt and current maturities................$ 59,614 $ 20,384
Accounts payable...................................... 92,254 62,194
Accrued salaries and bonuses.......................... 36,061 27,919
Income taxes payable.................................. 7,396 --
Other current liabilities............................. 144,108 140,123
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Total current liabilities........................... 339,433 250,620
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LONG-TERM DEBT, LESS CURRENT MATURITIES............... 360,199 302,665
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POSTRETIREMENT BENEFIT OBLIGATION..................... 79,979 80,885
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LONG-TERM DEFERRED REVENUE............................ 45,773 --
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OTHER LONG-TERM LIABILITIES........................... 65,190 66,103
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COMMITMENTS AND CONTINGENCIES (Note 5)
SHAREHOLDERS' EQUITY:
Common stock, $1.25 par value; shares
authorized - 300,000; issued - 170,510 in 1996
and 168,812 in 1995; outstanding - 144,526
in 1996 and 147,245 in 1995......................... 213,138 211,015
Preferred stock, $0.01 par value; shares
authorized - 10,000; issued and outstanding -
none in 1996 or 1995................................ -- --
Paid-in capital....................................... 194,805 171,020
Retained earnings..................................... 356,387 269,986
Cumulative foreign currency translation
adjustment.......................................... (12,769) (13,777)
Treasury stock, at cost, 19,430 shares in 1996
and 14,847 shares in 1995........................... (323,625) (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)
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Total shareholders' equity.......................... 363,352 353,422
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$1,253,926 $1,053,695
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The notes on pages 8 through 11 are an integral part of these balance sheets.
-3-
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
THREE MONTHS ENDED
SEPTEMBER 30,
(In thousands, except per share amounts) 1996 1995
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Operating revenue.................................... $ 454,986 $ 412,027
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Costs and expenses:
Costs of services.................................... 284,523 264,444
Selling, general and administrative expenses......... 89,422 81,483
Asset impairment (Note 9)............................ -- --
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Total operating expenses............................ 373,945 345,927
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Operating income..................................... 81,041 66,100
Other income, net.................................... 757 2,233
Interest expense..................................... (5,800) (5,398)
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Income before income taxes........................... 75,998 62,935
Provision for income taxes........................... 30,194 24,954
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Net income........................................... $ 45,804 $ 37,981
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Weighted average common shares outstanding........... 144,752 151,618
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Per common share:
Net income......................................... $ 0.32 $ 0.25
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Dividends.......................................... $ 0.083 $ 0.078
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The notes on pages 8 through 11 are an integral part of these statements.
-4-
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30,
(In thousands, except per share amounts) 1996 1995
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Operating revenue................................... $1,323,612 $1,203,626
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Costs and expenses:
Costs of services................................... 832,603 779,377
Selling, general and administrative expenses........ 269,088 241,396
Asset impairment (Note 9)........................... 10,313 --
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Total operating expenses........................... 1,112,004 1,020,773
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Operating income.................................... 211,608 182,853
Other income, net................................... 9,986 6,479
Interest expense.................................... (16,220) (15,319)
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Income before income taxes.......................... 205,374 174,013
Provision for income taxes.......................... 81,595 70,746
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Net income.......................................... $ 123,779 $ 103,267
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Weighted average common shares outstanding.......... 145,781 152,305
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Per common share:
Net income........................................ $ 0.85 $ 0.68
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Dividends......................................... $ 0.248 $ 0.233
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The notes on pages 8 through 11 are an integral part of these statements.
-5-
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (UNAUDITED)
NINE MONTHS ENDED
(In thousands) SEPTEMBER 30, 1996
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COMMON STOCK:
Balance at beginning of period................................... $ 211,015
Shares issued under stock plans.................................. 2,123
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Balance at end of period......................................... $ 213,138
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PAID-IN CAPITAL:
Balance at beginning of period................................... $ 171,020
Shares issued under stock plans.................................. 21,382
Other............................................................ 2,403
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Balance at end of period......................................... $ 194,805
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RETAINED EARNINGS:
Balance at beginning of period................................... $ 269,986
Net income....................................................... 123,779
Cash dividends paid.............................................. (37,378)
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Balance at end of period......................................... $ 356,387
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CUMULATIVE FOREIGN CURRENCY TRANSLATION ADJUSTMENT:
Balance at beginning of period................................... $ (13,777)
Adjustment during period......................................... 1,008
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Balance at end of period......................................... $ (12,769)
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TREASURY STOCK:
Balance at beginning of period................................... $ (218,613)
Cost of shares repurchased....................................... (105,550)
Cost of shares reissued for prior year acquisition............... 538
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Balance at end of period......................................... $ (323,625)
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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)
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The notes on pages 8 through 11 are an integral part of this statement.
-6-
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) NINE MONTHS ENDED
SEPTEMBER 30,
(In thousands) 1996 1995
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.......................................... $ 123,779 $ 103,267
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization..................... 61,860 58,027
Asset impairment (Note 9)......................... 10,313 --
Gain on sale of long-term investment.............. (8,232) --
Gain on sale of businesses........................ -- (847)
Changes in assets and liabilities:
Accounts receivable, net........................ (16,312) (11,007)
Current liabilities, excluding debt............. 40,474 (40,150)
Other current assets............................ 5,811 (8,422)
Deferred income taxes........................... (17,551) (3,498)
Other long-term liabilities, excluding debt. 52,208 (1,941)
Other assets.................................... (7,644) --
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Net cash provided by operating activities........... 244,706 95,429
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CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment................. (43,831) (19,626)
Additions to other assets, net...................... (27,740) (25,369)
Acquisitions, net of cash acquired.................. (120,617) (14,583)
Deferred payments on prior year acquisitions........ -- (8,743)
Proceeds from sale of long-term investment.......... 18,356 --
Proceeds from sale of businesses.................... -- 14,868
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Net cash used by investing activities (173,832) (53,453)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Net short-term borrowings........................... 23,671 18,401
Net long-term borrowings............................ 56,132 27,810
Dividends paid...................................... (37,378) (37,155)
Treasury stock purchases............................ (105,550) (71,853)
Proceeds from exercise of stock options............. 21,421 14,091
Other............................................... 2,044 1,563
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Net cash used by financing activities (39,660) (47,143)
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Effect of foreign currency exchange rates on cash. 264 1,298
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Net cash provided..................................... 31,478 (3,869)
Cash at beginning of period........................... 26,136 79,409
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Cash at end of period................................. $ 57,614 $ 75,540
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The notes on pages 8 through 11 are an integral part of these statements.
-7-
EQUIFAX INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 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 September 30, 1996 and the results of operations for the three and
nine months ended September 30, 1996 and 1995 and the cash flows for the nine
months ended September 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, and
insure lives and property. The principal lines of business are credit services,
payment services, and insurance 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 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 nine months of 1996, the Company repurchased
approximately 4,614,000 of its common shares through open market transactions at
an aggregate cost of $105,550,000 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, and is currently expected
to begin in the first quarter, 1997.
7. ACQUISITIONS:
During the first nine months of 1996, the Company acquired substantially all the
assets and business operations of the following companies:
Month Industry Percentage
Business Acquired Segment Ownership
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Creditel of Canada Limited September International 100%
CDB Infotek August Insurance 70%
Transax plc (U.K.) June International 100% (1)
Collective Credit Bureaus Ltd. (Canada) May International 100%
Professional Test Administrators, Inc. April Insurance 100%
Market Knowledge, Inc. January Credit 100%
(1) Increased to 100% from the 50.1% ownership position acquired in 1995 and 1992.
The Company also acquired the credit files of five credit bureaus located in the
United States. These business and credit file acquisitions were accounted for as
purchases, and had an aggregate purchase price of $125.0 million, with
approximately $78.7 million allocated to goodwill and $50.8 million to other
assets (primarily purchased data files and 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 September 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)
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Balance, December 31, 1995 11,292 -- 1,850 13,142
Utilized in 1996 (8,016) -- (1,356) (9,372)
------- ------- ------- -------
Balance, September 30, 1996 $ 3,276 $ -- $ 494 $ 3,770
======= ======= ======= =======
The reserve balance at September 30, 1996 is included in other current
liabilities in the accompanying balance sheets.
-10-
9. ASSET IMPAIRMENT AND DIVESTITURES:
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.
During the fourth quarter 1996, the Company announced its intent to divest of
all the Healthcare Information Services business units within the General
Information Services segment. As of mid-November 1996, the Healthcare
Administrative Services and the Healthcare EDI Services business units had been
sold, and the divestiture of the remaining business units is probable in the
next several months. Management anticipates that these transactions will not
have a material effect on the results of operations or financial condition of
the Company.
-11-
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
Results of Operations - (third quarter and first nine months of 1996 compared to
the third quarter and first nine months of 1995)
Revenue for both the third quarter and first nine months increased 10% over the
comparable periods of 1995. Excluding the effects of acquisitions and 1995
divestitures, revenue increased 10% in the third quarter and 11% year-to-date.
Operating income increased 23% in the third quarter and 16% year-to-date.
Excluding a $10.3 million second quarter, 1996 write-off related to asset
impairments in the General Information Services segment (Note 9), year-to-date
operating income improved 21% over the prior year. 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 21% and 26% respectively in the
third quarter and 20% and 25% year-to-date, with higher earnings per share
increases relative to net income increases a reflection of the Company's
continued repurchase 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. Third
quarter and first nine months 1995 information has been restated to conform with
the new presentation. Operating revenue and operating income by industry segment
for the third quarter and first nine months of 1996 and 1995 are as follows (in
thousands):
Third Quarter Nine Months
-------------------- -------------------------
Operating Revenue: 1996 1995 1996 1995
- ------------------ --------- --------- ----------- ------------
Credit Services $144,764 $129,836 $ 430,404 $ 374,838
Payment Services 84,732 72,645 235,582 202,354
Insurance Services 151,593 130,362 432,306 389,900
International Operations 58,992 55,532 171,434 154,663
General Information Services 14,905 23,652 53,886 81,871
-------- -------- ---------- ----------
$454,986 $412,027 $1,323,612 $1,203,626
======== ======== ========== ==========
Operating Income (Loss):
- ------------------------
Credit Services $ 52,145 $ 45,069 $ 150,972 $ 127,807
Payment Services 16,051 16,090 42,280 42,753
Insurance Services 14,790 11,353 37,764 32,052
International Operations 10,764 7,939 22,677 14,726
General Information Services (2,299) (3,560) (9,676) (7,316)
-------- -------- ---------- ----------
Operating Contribution 91,451 76,891 244,017 210,022
General Corporate Expense (10,410) (10,791) (32,409) (27,169)
-------- -------- ---------- ----------
$ 81,041 $ 66,100 $ 211,608 $ 182,853
======== ======== ========== ==========
The following discussion analyzes operating results by industry segment, general
corporate expense, and consolidated other income and effective income tax rates.
-12-
Credit Services
- ---------------
Revenue in Credit Services, which includes Credit Reporting Services, Mortgage
Information Services, Risk Management Services, and Equifax National Decision
Systems, increased 11% in the third quarter and 15% in the first nine months,
with two percentage points of these increases attributable to acquisitions.
Credit Reporting Services revenue, excluding acquisitions, was up 13% both in
the quarter and year-to-date driven by increased prescreening business for
credit card issuers and volume growth in the finance, automotive, 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, exclusive of a 1995
acquisition, declined 29% in the third quarter and 8% year-to-date. These
declines were due to the continuing shift to a lower priced automated product
and a slowing in mortgage lending activity due to increased interest rates. Risk
Management Services revenue was up 7% in the quarter and 17% year-to-date, due
primarily to new business from customers outsourcing the accounts receivable
management function of their businesses. Third quarter revenue growth, however,
was tempered by a decline in government student loan business. Revenue in
Equifax National Decision Systems increased 11% in the quarter and 17% year-to-
date.
Operating income increased 16% in the quarter and 18% in the first nine months
due primarily to the revenue growth within Credit Reporting Services. Strong
revenue growth within Risk Management Services in the first six months of 1996
also contributed to the year-to-date increase.
Payment Services
- ----------------
Revenue in Payment Services, which includes Check Services, Card Services, and
FBS Software, increased 17% in the quarter and 16% in the first nine 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 5% in the quarter and 3%
year-to-date, with declines in check guarantee revenue of 1% in the third
quarter and 2% year-to-date offset by increases in other Check Services
products. FBS Software revenue improved $2.3 million in the quarter and $7.3
million year-to-date due primarily to several large consulting projects which
began in the fourth quarter of 1995 and the first quarter of 1996.
Operating income in the third quarter was flat versus the prior year and was
down 1% year-to-date, due primarily 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, third quarter and year-to-date operating income increased 13%
and 7% respectively due primarily to the revenue growth within Card Services.
Insurance Services
- ------------------
Third quarter revenue increased 16%, with motor vehicle registry (the fee
charged by states for their records which the Company passes on to its
customers) accounting for seven percentage points of the increase and
acquisitions accounting for two percentage points. Year-to-date revenue
increased 11%, with six percentage points due to motor vehicle registry and one
percentage point due to acquisitions. The balance of the increases were due to
improvements in Data Services (up 21% in the quarter and 16% year-to-date),
Osborn Laboratories (up 32% in the quarter and 31% year-to-date) and CUE U.K.
(up 87% in the quarter and 102% in the first nine months). 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 third quarter revenue was offset by a decline in Commercial
Specialists.
Operating income improved 30% in the third quarter and 18% year-to-date, due
primarily to gains in Data Services, Osborn Laboratories, and CUE U.K. which
were partially offset by declines in Commercial Specialists.
-13-
International Operations
- ------------------------
International Operations revenue, adjusted for noncomparables (acquisitions and
the third quarter 1995 sale of the Canadian field services insurance products
business), increased 4% in both the third quarter and first nine months. In
local currencies, excluding noncomparables, third quarter and year-to-date
revenue increased 1% and 3% respectively in Canada and 7% and 8% respectively in
Europe. Within Canada, gains resulted primarily from Check Services and
Collection Services. Canadian Credit Services revenue was virtually flat in both
periods, as increases in credit report unit volumes were offset by average price
declines and lower revenues in several other related products. The gains within
Europe were attributable primarily to consumer credit and marketing services and
auto lien information services.
Third quarter operating income increased $2.8 million, with Canada down $.5
million, Europe improving by $2.5 million, and South American joint ventures up
$.9 million. Year-to-date operating income was up $8.0 million with increases of
$.8 million in Canada, $5.4 million in Europe and $2.0 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, third quarter revenue declined $2.6 million
while year-to-date revenue increased $3.6 million. The decline in the third
quarter was attributable to the loss of a major contract in the administrative
services area of Healthcare Information Services while the year-to-date increase
was primarily due to HISI's recognition of $5.0 million from its lottery
subcontract with GTECH in the first quarter of 1996 (Note 6).
This segment's operating loss improved by $1.3 million in the third quarter due
primarily to cost controls implemented in several of the Healthcare Services
business units. The year-to-date operating loss increased $2.4 million, due
primarily to the recording of a $10.3 million asset impairment loss within
Healthcare Information Services (Note 9) partially offset by HISI's recognition
of $5.0 million revenue in the first quarter and a $2.3 million gain in the
second quarter related to a settlement with their insurance carrier.
During the fourth quarter, the Company announced its intent to divest of the
business units within Healthcare Information Services based on a re-evaluation
of strategic priorities and changing trends within the healthcare industry (Note
9).
General Corporate Expense
- -------------------------
General corporate expense decreased $.4 million in the third quarter and
increased $5.2 million year-to-date. The year-to-date increase was due primarily
to higher benefit and incentive accruals and expenses for projects related to
system enhancements.
Other Income and Effective Income Tax Rates
- -------------------------------------------
Other income declined $1.5 million in the third quarter due primarily to a one-
time gain recorded in 1995. Year-to-date other income increased $3.5 million as
a result of an $8.2 million gain recorded for the second quarter 1996 sale of
the Company's 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 year-to-date effective income tax rate declined to 39.7% from 40.7% due in
large part to a change in the mix of foreign income between tax jurisdictions
with different effective tax rates.
-14-
FINANCIAL CONDITION
The Company's financial condition remained strong during the first nine months
of 1996. Net cash provided by operations increased from $95.4 million to $244.7
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 nine months included $105.6 million of
treasury stock purchases (Note 4), and $120.6 million for acquisitions (Note 7).
These items were principally financed by excess cash from operations and a $79.8
million increase in short-term notes and long-term debt.
Capital expenditures for the remainder of 1996 are currently projected to be
approximately $36 million, exclusive of acquisitions. Additional expenditures
are possible as opportunities arise. As of September 30, 1996, approximately $52
million remains authorized under the Company's share repurchase program.
The remaining 1996 capital expenditures should be met with internally generated
funds. At September 30, 1996, $550 million was available under the Company's
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.
-15-
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 September 30, 1996 and the
related interim consolidated statements of income for the nine-month and three-
month periods ended September 30, 1996 and 1995, shareholders' equity for the
nine-month period ended September 30, 1996, and cash flows for the nine-month
periods ended September 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
November 12, 1996
- 16 -
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 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 November 12, 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.
- 17 -
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
EQUIFAX INC.
------------
(Registrant)
Date: November 13, 1996 /s/ D. W. McGlaughlin
----------------------------
D. W. McGlaughlin, President
and Chief Executive Officer
Date: November 13, 1996 /s/ P. J. Mazzilli
----------------------------
P. J. Mazzilli
Corporate Vice President,
Controller and Treasurer
- 18 -
EXHIBIT INDEX
-------------
Exhibit Description of Exhibit
- ------- ----------------------
15 Arthur Andersen LLP
Letter dated November 12, 1996
- 19 -