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, 1997
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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 March 31, 1997
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Common Stock, $1.25 Par Value 151,734,751
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INDEX
Page No.
Part I. Financial Information
Consolidated Balance Sheets --
March 31, 1997 and December 31, 1996 2 - 3
Consolidated Statements of Income --
Three Months Ended March 31, 1997 and 1996 4
Consolidated Statement of Shareholders'
Equity -- Three Months Ended March 31, 1997 5
Consolidated Statements of Cash Flows --
Three Months Ended March 31, 1997 and 1996 6
Notes to Consolidated Financial Statements 7 - 8
Management's Discussion and Analysis of Results of
Operations and Financial Condition 9 - 11
Part II. Other Information 12 - 13
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PART I. FINANCIAL INFORMATION
CONSOLIDATED BALANCE SHEETS
MARCH 31, DECEMBER 31,
(In thousands) 1997 1996
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(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 48,405 $ 49,886
Accounts receivable 305,906 305,678
Deferred income tax assets 34,964 36,999
Other current assets 56,118 44,475
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Total current assets 445,393 437,038
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PROPERTY AND EQUIPMENT:
Land, buildings and improvements 33,963 29,563
Data processing equipment and furniture 264,193 257,321
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298,156 286,884
Less accumulated depreciation 161,916 164,613
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136,240 122,271
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GOODWILL 471,319 433,758
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PURCHASED DATA FILES 100,888 87,025
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OTHER ASSETS 214,185 222,692
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$1,368,025 $1,302,784
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The notes on pages 7 and 8 are an integral part of these consolidated balance
sheets.
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CONSOLIDATED BALANCE SHEETS
MARCH 31, DECEMBER 31,
(In thousands, except par value) 1997 1996
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(Unaudited)
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term debt and current maturities of long-term debt $ 76,349 $ 60,490
Accounts payable 86,715 84,628
Accrued salaries and bonuses 29,400 39,276
Income taxes payable 24,362 17,659
Other current liabilities 168,097 172,626
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Total current liabilities 384,923 374,679
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LONG-TERM DEBT, LESS CURRENT MATURITIES 331,762 305,992
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POSTRETIREMENT BENEFIT OBLIGATIONS 79,572 79,400
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LONG-TERM DEFERRED REVENUE 40,555 42,964
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OTHER LONG-TERM LIABILITIES 75,220 74,884
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COMMITMENTS AND CONTINGENCIES (Note 5)
SHAREHOLDERS' EQUITY:
Common stock, $1.25 par value; shares authorized -
300,000; issued - 171,395 in 1997 and 170,859 in 1996;
outstanding - 145,182 in 1997 and 144,876 in 1996 214,244 213,573
Preferred stock, $0.01 par value; shares authorized -
10,000; issued and outstanding - none in 1997 or 1996 -- --
Paid-in capital 217,131 207,142
Retained earnings 428,527 396,340
Cumulative foreign currency translation adjustment (9,059) (3,998)
Treasury stock, at cost, 19,660 shares in 1997
and 19,430 shares in 1996 (330,283) (323,625)
Stock held by employee benefits trusts, at cost,
6,553 shares in 1997 and 1996 (64,567) (64,567)
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Total shareholders' equity 455,993 424,865
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$1,368,025 $1,302,784
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The notes on pages 7 and 8 are an integral part of these consolidated balance
sheets.
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CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
(In thousands, except per share amounts) 1997 1996
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Operating revenue $ 478,200 $ 423,011
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Costs of services 303,635 270,370
Selling, general and administrative expenses 93,831 86,717
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Total operating expenses 397,466 357,087
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Operating income 80,734 65,924
Other income, net 383 448
Interest expense (6,088) (5,239)
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Income before income taxes 75,029 61,133
Provision for income taxes 30,312 24,288
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Net income $ 44,717 $ 36,845
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Weighted average common shares outstanding 145,176 146,669
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Per common share:
Net income $ 0.31 $ 0.25
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Dividends $ 0.083 $ 0.083
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The notes on pages 7 and 8 are an integral part of these consolidated
statements.
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CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (UNAUDITED)
THREE MONTHS ENDED
(In thousands) MARCH 31, 1997
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COMMON STOCK:
Balance at beginning of period $ 213,573
Shares issued under stock plans 671
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Balance at end of period $ 214,244
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PAID-IN CAPITAL:
Balance at beginning of period $ 207,142
Shares issued under stock plans 9,448
Other 541
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Balance at end of period $ 217,131
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RETAINED EARNINGS:
Balance at beginning of period $ 396,340
Net income 44,717
Cash dividends paid (12,530)
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Balance at end of period $ 428,527
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CUMULATIVE FOREIGN CURRENCY TRANSLATION ADJUSTMENT:
Balance at beginning of period $ (3,998)
Adjustment during period (5,061)
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Balance at end of period $ (9,059)
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TREASURY STOCK:
Balance at beginning of period $ (323,625)
Cost of shares repurchased (6,658)
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Balance at end of period $ (330,283)
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STOCK HELD BY EMPLOYEE BENEFITS TRUSTS:
Balance at beginning of period $ (64,567)
Cost of shares reissued under stock plans --
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Balance at end of period $ (64,567)
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The notes on pages 7 and 8 are an integral part of this consolidated statement.
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CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
(In thousands) 1997 1996
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 44,717 $ 36,845
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 23,940 19,118
Changes in assets and liabilities:
Accounts receivable, net 4,019 1,186
Current liabilities, excluding debt (7,902) 18,551
Other current assets (8,189) 8,224
Deferred income taxes 2,779 (2,205)
Other long-term liabilities, excluding debt (1,602) 45,711
Other assets 1,874 --
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Net cash provided by operating activities 59,636 127,430
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CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment (17,149) (9,698)
Additions to other assets, net (12,576) (8,630)
Acquisitions, net of cash acquired (57,157) (14,975)
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Net cash used by investing activities (86,882) (33,303)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Net short-term borrowings 16,186 4,813
Additions to long-term debt 37,384 383
Payments on long-term debt (15,692) (45,778)
Dividends paid (12,530) (12,796)
Treasury stock purchases (6,658) (30,255)
Proceeds from exercise of stock options 5,595 7,551
Other 541 541
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Net cash provided (used) by financing activities 24,826 (75,541)
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Effect of foreign currency exchange rates on cash 939 55
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Net cash provided (used) (1,481) 18,641
Cash and cash equivalents, beginning of period 49,886 26,136
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Cash and cash equivalents, end of period $ 48,405 $ 44,777
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The notes on pages 7 and 8 are an integral part of these consolidated
statements.
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EQUIFAX INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MARCH 31, 1997
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 March 31, 1997 and the results of operations and cash flows for
the three months ended March 31, 1997 and 1996. 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, 1996.
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. On December 9, 1996, the Company announced its intention to split into
two independent publicly traded companies by spinning off its Insurance Services
industry segment. The spinoff will be effected through a pro rata tax-free
dividend of stock in the new company to existing Equifax shareholders, and is
contingent on receiving a favorable ruling from the IRS, among other things. The
timing of the distribution has not yet been finalized, but is currently expected
to occur mid-1997.
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 three months of 1997, the Company repurchased
approximately 230,000 of its common shares through open market transactions at
an aggregate cost of $6,658,000, leaving approximately $45 million available for
future share repurchases. In April 1997, the Company's Board of Directors
authorized an additional $100 million for future share repurchases.
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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." The
Company periodically evaluates the estimated fair value of the CSC collection
and credit reporting businesses using estimates of their discounted cash flows.
Based on this analysis, at December 31, 1996, the fair value of these businesses
is not less than their potential purchase price.
6. ACQUISITIONS AND DIVESTITURES:
During the first three months of 1997, the Company acquired two risk management
services businesses and the credit files of five credit bureaus located in the
United States, and also acquired the remaining 50% interest in DICOM S.A. in
Chile. These business and credit file acquisitions were accounted for as
purchases and had an aggregate purchase price of $69,045,000, with $50.4 million
allocated to goodwill, $17.7 million allocated to purchased data files, and
$13.5 million allocated to other assets (primarily software). These allocations
included $25.2 million reallocated from other assets related to the Company's
first 50% equity investment in DICOM S.A. Their results of operations have been
included in the consolidated statement of income from their respective dates of
purchase and were not material to the results of operation of the Company.
During the fourth quarter of 1996, the Company sold all of the healthcare
information business units from its General Information Services industry
segment. Cash proceeds, net of related divestiture costs, totaled $49,081,000
and resulted in an $11,564,000 gain recorded in other income ($1,631,000 after
tax, or $.01 per share).
7. RECENT ACCOUNTING PRONOUNCEMENTS:
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128 ("SFAS 128"), "Earnings Per Share." SFAS
128 requires companies that have publicly held common stock or common stock
equivalents to present both basic and diluted earnings per share ("EPS") on the
face of the income statement. Basic EPS is calculated as income available to
common stockholders divided by the weighted average number of common shares
outstanding during the period. Diluted EPS is calculated to reflect the
potential dilution that would occur if stock options or other contracts to issue
common stock were exercised and resulted in additional common stock that would
share in the earnings of the Company. This statement is effective for financial
statements issued for interim and annual periods ending after December 15, 1997.
The Company does not believe the adoption of SFAS 128 will have a significant
impact on the Company's reported EPS.
-8-
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
Results of Operations - (first quarter of 1997 compared to the first quarter of
1996)
First quarter revenue increased 13.0% over 1996. After adjusting for the fourth
quarter 1996 divestitures of all of the healthcare information business units
within the General Information Services segment, revenue increased 17.6% with
approximately 8.5 percentage points attributable to acquisitions. Operating
income of $80.7 million increased 22.5% over the prior year. This increase is
primarily the result of revenue growth in higher margin business units.
Net income for the quarter increased 21.4%, from $36.8 million to $44.7 million.
Net income per share increased to $0.31 in 1997, compared to $0.25 in the prior
year. During the first quarter, the Company expensed approximately $1.0 million
(pretax) in costs related to modification of computer software for compliance
with Year 2000, and expects that the total 1997 net earnings impact of these
modification expenses will be approximately $.04 to $.05 per share.
Operating revenue and operating income by industry segment for the first quarter
of 1997 and 1996 are as follows (in thousands):
Operating Revenue: 1997 1996
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Credit Services $146,654 $138,690
Payment Services 98,820 71,598
International Operations 63,620 54,646
Insurance Services 166,697 135,755
General Information Services 2,409 22,322
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$478,200 $423,011
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Operating Income (Loss): 1997 1996
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Credit Services $ 52,122 $ 47,539
Payment Services 16,083 11,815
International Operations 6,531 4,012
Insurance Services 13,268 9,858
General Information Services 2,217 3,209
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Operating Contribution 90,221 76,433
General Corporate Expense (9,487) (10,509)
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$ 80,734 $ 65,924
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The following discussion analyzes operating results by industry segment, general
corporate expense, and consolidated effective income tax rates.
-9-
Credit Services
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Revenue in Credit Services, which includes Credit Reporting Services, Mortgage
Information Services, Risk Management Services, and Equifax National Decision
Systems, increased 5.7% in the first quarter, with approximately two percentage
points attributable to acquisitions. Credit Reporting Services was up 7.8% in
the quarter primarily due to increased prescreening business for credit card
issuers and volume growth in the finance and telecommunications industries.
Average prices continue to decline but were more than offset by continued volume
growth. Revenue in Mortgage Information Services was down 46% reflecting a
decline in refinancing activity due to interest rate movements and the
continuing shift to a lower priced automated product. Risk Management Services
revenue increased 12.3% due to new business from customers outsourcing the
accounts receivable management function of their businesses.
Operating income in the first quarter increased 9.6% over the prior year due
primarily to the revenue growth in Credit Reporting Services and Risk Management
Services.
Payment Services
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Revenue in Payment Services, which includes Card Services, Check Services, and
FBS Software, increased 38.0% over the prior year with 23.6 percentage points of
the revenue increase due to the fourth quarter 1996 acquisition of CSG Card
Services. Exclusive of this acquisition, Card Services revenue increased 21.3%
with growth driven by increases in processing of both cardholder and merchant
transactions. Check Services revenue increased 8.0% while FBS Software revenues
were up slightly in the quarter.
Operating income increased 36.1% in the quarter driven by the revenue growth
within Card Services and the improved operating performance of Check Services.
The CSG acquisition was immaterial to this segment's operating income growth in
the quarter.
International Operations
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International Operations revenue increased 16.4% with 10.6 percentage points
attributable to acquisitions. Revenue in Europe was up 9.0% in the quarter.
Revenue was also up in Canada due to 1996 acquisitions.
This segment's operating income increased $2.5 million in the first quarter and
primarily resulted from improved performance within Europe due to the operating
leverage obtained from the integration of recent acquisitions.
Insurance Services
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First quarter revenue increased 22.8%, with 6.6 percentage points attributable
to acquisitions and 8.4 percentage points due to motor vehicle registry (the fee
charged by states for their records, which the Company passes on to its
customers). The balance of the increase was due to improvements in Data Services
(up 30.4%) and Osborn Laboratories (up 24.0%) resulting primarily from volume
increases over the prior year. Revenue from Field Services, exclusive of a 1996
acquisition was up 3.2%.
Operating income increased 34.6% in the first quarter primarily due to the
revenue growth within Data Services and improved operating performance of Field
Services.
In December 1996, the Company announced its intention to spin off this segment,
and currently expects the spinoff to occur mid-1997 (Note 2).
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General Information Services
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This segment includes HISI, the lottery services subsidiary, and the healthcare
information businesses which the Company divested in the fourth quarter 1996.
Revenue declined $19.9 million in the first quarter, with $17.3 million
attributable to the healthcare divestitures and $2.6 million to HISI. The HISI
decline resulted from the Company's recognition of $5.0 million in revenue in
the first quarter of 1996 in conjunction with its $58 million subcontracting
agreement with GTECH. The remaining $53 million was recorded as deferred revenue
on the balance sheet and beginning in December 1996 is being recognized over a
66 month term, net of related expenses, and resulted in $2.4 million in revenue
in the first quarter 1997.
Operating income declined $1.0 million, as an improvement due to the divestiture
of the healthcare information businesses, which had incurred losses in 1996, was
more than offset by lower profits from the lottery subcontract due to the
revenue decline.
General Corporate Expense
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General corporate expense declined $1.0 million from the prior year due
primarily to lower staffing levels and related costs.
Effective Income Tax Rates
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The effective income tax rate increased to 40.4% in 1997 from 39.7% in 1996 due
to higher expected tax expense associated with U.K. operations, where most net
operating loss carryforwards have been utilized.
FINANCIAL CONDITION
The Company's financial condition remained strong during the first quarter of
1997. Net cash provided by operations decreased from $127.4 million to $59.6
million primarily due to the first quarter 1996 receipt of $58 million related
to a lottery subcontract and the timing of payments between years for income
taxes and certain other accrued expenses. Normal capital expenditures and
dividend payments were met with these internally generated funds.
Other significant outlays in the first quarter included $6.7 million of treasury
stock purchases (Note 4), $57.2 million for acquisitions (Note 6), and $15.7
million in long-term debt repayments. These items were principally financed by a
combination short-term and long-term debt increases totaling $53.6 million and
excess cash from operations.
Capital expenditures for the remainder of 1997 are currently projected to be
approximately $90 million, exclusive of acquisitions. Additional expenditures
are possible as opportunities arise. As of March 31, 1997, approximately $45
million remained authorized under the Company's share repurchase program, and
purchases have continued in the second quarter. In April, the Company's Board of
Directors authorized an additional $100 million for future share repurchases.
The remaining 1997 capital expenditures should be met with internally generated
funds. At March 31, 1997, $505 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.
-11-
PART II. OTHER INFORMATION
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Item 5. Other Information
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Reference is made to information reported in Notes 1, 2, 3, 4 and 6 of the Notes
to Consolidated Financial Statements, included in Part I of this report.
Item 6. Exhibits and Reports on Form 8-K
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(a) Reports on Form 8-K
Registrant did not file any reports on Form 8-K during the quarter for
which this report is filed.
-12-
SIGNATURES
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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.
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(Registrant)
Date: May 14, 1997 /s/ D. W. McGlaughlin
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D. W. McGlaughlin, President
and Chief Executive Officer
Date: May 14, 1997 /s/ P. J. Mazzilli
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P. J. Mazzilli
Corporate Vice President,
Treasurer and Controller
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