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, 1998
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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
- ------------------------------- -------------------
(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
- -------------------------------------------- ----------
(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, 1998
----- ----------------------------
Common Stock, $1.25 Par Value 147,982,911
INDEX
Page No.
Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets --
June 30, 1998 and December 31, 1997 2 - 3
Consolidated Statements of Income --
Three Months Ended June 30, 1998 and 1997 4
Consolidated Statements of Income --
Six Months Ended June 30, 1998 and 1997 5
Consolidated Statement of Shareholders'
Equity -- Six Months Ended June 30, 1998 6
Consolidated Statements of Cash Flows --
Six Months Ended June 30, 1998 and 1997 7
Notes to Consolidated Financial Statements 8 - 11
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12 - 15
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 15
Part II. Other Information
Item 4. Submission of Matters to a Vote of Security Holders 16
Item 5. Other Information 16
Item 6. Exhibits and Reports on Form 8-K 17
Exhibit Index 19
1
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
JUNE 30, DECEMBER 31,
(In thousands) 1998 1997
- -------------- ----------- ------------
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 141,697 $ 52,251
Accounts receivable 317,131 270,665
Deferred income tax assets 36,187 39,221
Other current assets 56,107 38,795
---------- ----------
Total current assets 551,122 400,932
---------- ----------
PROPERTY AND EQUIPMENT:
Land, buildings and improvements 25,748 24,870
Data processing equipment and furniture 218,776 194,553
---------- ----------
244,524 219,423
Less accumulated depreciation 134,924 124,689
---------- ----------
109,600 94,734
---------- ----------
GOODWILL 437,779 365,427
---------- ----------
PURCHASED DATA FILES 110,129 103,282
---------- ----------
OTHER ASSETS 217,422 212,729
---------- ----------
$1,426,052 $1,177,104
========== ==========
The notes on pages 8 through 11 are an integral part of these consolidated
balance sheets.
2
CONSOLIDATED BALANCE SHEETS
JUNE 30, DECEMBER 31,
(In thousands, except par value) 1998 1997
- -------------------------------- ------------ ------------
(Unaudited)
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term debt and current maturities of long-term debt $ 10,753 $ 12,984
Accounts payable 121,345 94,682
Accrued salaries and bonuses 20,313 26,404
Income taxes payable 12,186 13,827
Other current liabilities 187,178 179,712
---------- ----------
Total current liabilities 351,775 327,609
---------- ----------
LONG-TERM DEBT, LESS CURRENT MATURITIES 555,973 339,301
---------- ----------
LONG-TERM DEFERRED REVENUE 37,510 42,848
---------- ----------
OTHER LONG-TERM LIABILITIES 119,497 117,949
---------- ----------
COMMITMENTS AND CONTINGENCIES (Note 7)
SHAREHOLDERS' EQUITY:
Common stock, $1.25 par value; shares authorized -
300,000; issued - 173,175 in 1998 and 172,465 in 1997;
outstanding - 141,432 in 1998 and 142,609 in 1997 216,469 215,581
Preferred stock, $0.01 par value; shares authorized -
10,000; issued and outstanding - none in 1998 or 1997 -- --
Paid-in capital 254,183 244,496
Retained earnings 491,017 421,541
Accumulated other comprehensive income (Note 5) (24,880) (20,076)
Treasury stock, at cost, 25,192 shares in 1998
and 23,304 shares in 1997 (510,937) (447,578)
Stock held by employee benefits trusts, at cost,
6,552 shares in 1998 and 6,553 shares in 1997 (64,555) (64,567)
---------- ----------
Total shareholders' equity 361,297 349,397
---------- ----------
$1,426,052 $1,177,104
========== ==========
The notes on pages 8 through 11 are an integral part of these consolidated
balance sheets.
3
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
THREE MONTHS ENDED
JUNE 30,
(In thousands, except per share amounts) 1998 1997
- ---------------------------------------- -------------------------
Operating revenue $ 393,464 $ 342,966
---------- ----------
Costs of services 223,453 196,028
Selling, general and administrative expenses 77,828 69,174
---------- ----------
Total operating expenses 301,281 265,202
---------- ----------
Operating income 92,183 77,764
Other income, net 649 42,791
Interest expense (8,222) (5,335)
---------- ----------
Income from continuing operations before income taxes 84,610 115,220
Provision for income taxes 33,978 54,030
---------- ----------
Income from continuing operations 50,632 61,190
---------- ----------
Discontinued operations:
Income from discontinued operations, net of income
taxes of $5,776 -- 8,160
Costs associated with effecting the spinoff, net of
income tax benefit of $2,154 -- (12,887)
---------- ----------
Total discontinued operations -- (4,727)
---------- ----------
Net income $ 50,632 $ 56,463
========== ==========
Per common share (basic):
Income from continuing operations $ 0.36 $ 0.42
Discontinued operations -- (0.03)
---------- ----------
Net income $ 0.36 $ 0.39
========== ==========
Shares used in computing basic earnings per share 141,365 144,575
========== ==========
Per common share (diluted):
Income from continuing operations $ 0.35 $ 0.41
Discontinued operations -- (0.03)
---------- ---------
Net income $ 0.35 $ 0.38
========== ==========
Shares used in computing diluted earnings per share 144,430 148,115
========== ==========
Dividends per share $ 0.0875 $ 0.0875
========== ==========
The notes on pages 8 through 11 are an integral part of these
consolidated statements.
4
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
SIX MONTHS ENDED
JUNE 30,
(In thousands, except per share amounts) 1998 1997
- ---------------------------------------- --------------------------
Operating revenue $ 746,558 $ 655,028
----------- ----------
Costs of services 425,423 378,731
Selling, general and administrative expenses 147,958 129,986
----------- ----------
Total operating expenses 573,381 508,717
----------- ----------
Operating income 173,177 146,311
Other income, net 1,370 43,163
Interest expense (15,254) (9,804)
----------- ----------
Income from continuing operations before income taxes 159,293 179,670
Provision for income taxes 63,926 79,939
----------- ----------
Income from continuing operations 95,367 99,731
----------- ----------
Discontinued operations:
Income from discontinued operations, net of income
taxes of $10,179 -- 14,336
Costs associated with effecting the spinoff, net of
income tax benefit of $2,154 -- (12,887)
----------- ----------
Total discontinued operations -- 1,449
----------- ----------
Net income $ 95,367 $ 101,180
=========== ==========
Per common share (basic):
Income from continuing operations $ 0.67 $ 0.69
Discontinued operations -- 0.01
----------- ----------
Net income $ 0.67 $ 0.70
=========== ==========
Shares used in computing basic earnings per share 141,534 144,875
=========== ==========
Per common share (diluted):
Income from continuing operations $ 0.66 $ 0.67
Discontinued operations -- 0.01
----------- ----------
Net income $ 0.66 $ 0.68
=========== ==========
Shares used in computing diluted earnings per share 144,545 148,533
=========== ==========
Dividends per share $ 0.1750 $ 0.1700
=========== ==========
The notes on pages 8 through 11 are an integral part of these consolidated
statements.
5
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (UNAUDITED)
SIX MONTHS ENDED
(In thousands) JUNE 30, 1998
- -------------- ----------------
COMMON STOCK:
Balance at beginning of period $ 215,581
Shares issued under stock plans 888
---------
Balance at end of period $ 216,469
=========
PAID-IN CAPITAL:
Balance at beginning of period $ 244,496
Shares issued under stock plans 8,591
Other 1,096
---------
Balance at end of period $ 254,183
=========
RETAINED EARNINGS:
Balance at beginning of period $ 421,541
Net income 95,367
Cash dividends paid (25,891)
---------
Balance at end of period $ 491,017
=========
ACCUMULATED OTHER COMPREHENSIVE INCOME (Note 5):
Balance at beginning of period $ (20,076)
Adjustment during period (4,804)
---------
Balance at end of period $ (24,880)
=========
TREASURY STOCK:
Balance at beginning of period $(447,578)
Cost of shares repurchased (63,262)
Other (97)
---------
Balance at end of period $(510,937)
=========
STOCK HELD BY EMPLOYEE BENEFITS TRUSTS:
Balance at beginning of period $ (64,567)
Cost of shares reissued under stock plans 12
---------
Balance at end of period $ (64,555)
=========
The notes on pages 8 through 11 are an integral part of this consolidated
statement.
6
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) SIX MONTHS ENDED
JUNE 30,
(In thousands) 1998 1997
- -------------- ------------ ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 95,367 $101,180
Less income from discontinued operations -- (1,449)
--------- --------
Income from continuing operations 95,367 99,731
Adjustments to reconcile income from continuing operations to
net cash provided by operating activities of continuing operations:
Depreciation and amortization 45,501 36,669
Gain from sale of business -- (42,798)
Changes in assets and liabilities:
Accounts receivable, net (28,730) (12,599)
Current liabilities, excluding debt 29,542 9,391
Other current assets (7,920) (9,764)
Deferred income taxes 6,990 4,151
Other long-term liabilities, excluding debt (13,565) 5,112
Other assets (13,332) 2,222
--------- --------
Net cash provided by operating activities of continuing operations 113,853 92,115
--------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment (23,773) (18,647)
Additions to other assets, net (30,101) (30,847)
Acquisitions, net of cash acquired (88,179) (63,684)
Proceeds from sale of business -- 80,998
Investments in unconsolidated affiliates (2,200) --
--------- --------
Net cash used in investing activities of continuing operations (144,253) (32,180)
--------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net short-term borrowings (7,590) 2,400
Net additions to long-term debt 208,907 17,650
Dividends paid (25,891) (25,730)
Treasury stock purchases (63,262) (51,434)
Proceeds from exercise of stock options 6,558 13,225
Other 1,096 1,114
--------- --------
Net cash provided (used) by financing activities of continuing operations 119,818 (42,775)
--------- --------
Effect of foreign currency exchange rates on cash 28 1,109
Net cash used in discontinued operations -- (4,514)
--------- --------
Net cash provided 89,446 13,755
Cash and cash equivalents, beginning of period 52,251 48,160
--------- --------
Cash and cash equivalents, end of period $ 141,697 $ 61,915
========= ========
The notes on pages 8 through 11 are an integral part of these consolidated
statements.
7
EQUIFAX INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 1998
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, 1998 and the results of operations for the three and six
months ended June 30, 1998 and 1997, and the cash flows for the six months ended
June 30, 1998 and 1997. 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, 1997.
2. NATURE OF OPERATIONS:
The Company principally provides information services to businesses to help them
grant credit and authorize and process credit card and check transactions. The
principal lines of business are information services and payment services (see
Note 8 for industry segment information). The principal markets for both
information and payment services are retailers, banks and other financial
institutions, with information services also serving the telecommunications and
utility industries. The Company's operations are predominately located within
the United States, with foreign operations principally located within Canada,
the United Kingdom, Chile and Argentina.
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. DISCONTINUED OPERATIONS:
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, contingent on receiving a favorable ruling from the IRS
regarding the tax-free status of the dividend for U.S. shareholders. In July
1997, the Company received the favorable IRS ruling and on August 7, 1997
completed the spinoff of its Insurance Services industry segment. The spinoff
was accomplished by the Company's contribution of the business units that
comprised the Insurance Services segment into one wholly owned subsidiary,
ChoicePoint Inc. All of the common stock of ChoicePoint was then distributed to
Equifax shareholders as a dividend, with one share of ChoicePoint common stock
distributed for each ten shares of Equifax common stock held. As a result of the
spinoff, the Company's consolidated statements of income and consolidated
statement of cash flows for periods ending in 1997 have been prepared with the
Insurance Services segment results of operations and cash flows shown as
"discontinued operations". During the second quarter of 1997, the Company
recorded an expense of $15,041,000 ($12,887,000 after tax, or $.09 per share) to
reflect the net costs associated with effecting the spinoff.
8
5. LONG-TERM DEBT:
In June 1998, the Company issued new 6.3% seven-year notes with a face value of
$250,000,000 in a public offering. The notes were sold at a discount of
$1,172,500. In July 1998, the Company issued new 6.9% thirty-year debentures
with a face value of $150,000,000 in a public offering. The debentures were sold
at a discount of $1,500,000. The discounts and related issuance costs will be
amortized on a straight-line basis over the respective term of the notes and
debentures.
6. SHAREHOLDERS' EQUITY:
TREASURY STOCK. During the first six months of 1998, the Company repurchased
approximately 1,883,000 of its common shares through open market transactions at
an aggregate cost of $63,262,000, leaving approximately $160 million available
for future share repurchases.
COMPREHENSIVE INCOME. Effective with the first quarter, 1998 the Company
adopted FASB Statement No. 130, "Reporting Comprehensive Income". For the six
month periods ending June 30, 1998 and 1997, comprehensive income is as follows:
Six Months Ended
June 30
(In Thousands) 1998 1997
- -------------- ------- --------
Net Income $95,367 $101,180
Change in cumulative foreign
currency translation adjustment (4,804) (3,126)
------- --------
Comprehensive income $90,563 $ 98,054
======= ========
Accumulated other comprehensive income at June 30, 1998 and December 31, 1997
consists of the following components:
(In Thousands) June 30, 1998 December 31, 1997
- -------------- ------------- -----------------
Cumulative foreign currency
translation adjustment $18,488 $13,684
Adjustment for minimum liability
under supplemental retirement plan 6,392 6,392
------- -------
$24,880 $20,076
======= =======
9
7. 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 initial term of the agreement expired
in July 1998, and was renewable at the option of CSC for successive ten-year
periods. CSC has renewed the agreement for the ten-year period beginning August
1, 1998. The agreement provides CSC with an option to sell its credit reporting
businesses to the Company, and provides the Company with an option to purchase
CSC's credit reporting businesses if CSC does not elect to renew the agreement
or if there is a change in control of CSC while the agreement is in effect. Both
options expire in 2013. As of August 1, 1998, the option price is determined by
appraisal.
On November 25, 1997, CSC exercised an option, also contained in the agreement,
to sell its collection businesses to the Company at a purchase price of
approximately $38 million. This transaction was finalized in the second quarter
of 1998. Subsequent to November 25, 1997, the Company determined that the fair
value of the business being sold (based on its estimated discounted cash flows)
was less than the contractual purchase price because a major contract expiring
in 1998 would not be renewed. Accordingly, in the fourth quarter of 1997, the
Company recorded a $25,000,000 charge ($14,950,000 after tax, or $.10 per share)
to reflect a valuation loss on this acquisition, with a corresponding
$25,000,000 liability included in other current liabilities. As of June 30,
1998, the $25,000,000 liability has been reclassified to reduce the amount of
goodwill recorded with this acquisition.
8. ACQUISITIONS AND DIVESTITURE:
During the first six months of 1998, the Company acquired a risk management
services business in the U.S. (Note 7), a risk management services business in
the United Kingdom, and the credit files of seven affiliates located in the
United States. The Company also increased its ownership to greater than 50% in
two foreign affiliates in Spain and Peru and began consolidating their
operations. These businesses and increased equity interests were acquired for
cash, accounted for as purchases, and had a total purchase price of $93.8
million. Also, during the first quarter of 1998, the Company obtained the
control necessary and began to consolidate the operations of its 66.7%
investment in Organizacion VERAZ S.A. in Argentina which was acquired in 1997
and 1994. These acquisitions and the consolidation of VERAZ resulted in $79.4
million of goodwill and $12.3 million of purchased data files. These allocations
include $26.0 million reallocated from other assets related to the Company's
investment in VERAZ and two other foreign affiliates previously accounted for
under the equity method. Their results of operations have been included in the
consolidated statements of income from the dates of acquisition and were not
material.
During the second quarter of 1997, the company sold its National Decision
Systems business unit from its North American Information Services industry
segment. Cash proceeds, net of related divestiture expenses, totaled $80,998,000
and resulted in a gain of $42,798,000 recorded in other income ($17,881,000
after tax, or $.12 per share).
10
9. INDUSTRY SEGMENT INFORMATION:
Effective with the first quarter, 1998, the Company adopted FASB Statement No.
131, "Disclosures About Segments of an Enterprise and Related Information".
Operating revenue and operating income by industry segment for the second
quarter and first six months of 1998 and 1997 are as follows:
Second Quarter Six Months
----------------------------------- -----------------------------------
Operating Revenue: 1998 1997 1998 1997
- ------------------ -------------- -------------- -------------- --------------
North American Information Services $195,441 $182,296 $376,875 $354,536
Payment Services 120,975 105,519 228,124 204,339
Equifax Europe 56,673 43,127 103,106 81,710
Equifax Latin America 17,966 9,620 33,635 9,626
Other 2,409 2,404 4,818 4,817
-------- -------- -------- --------
$393,464 $342,966 $746,558 $655,028
======== ======== ======== ========
Operating Income:
- -----------------
North American Information Services $ 69,351 $ 62,904 $131,717 $119,638
Payment Services 22,569 18,476 41,869 34,559
Equifax Europe 6,010 4,705 9,068 6,665
Equifax Latin America 4,346 2,590 8,532 3,132
Other 2,217 2,217 4,432 4,434
-------- -------- -------- --------
Operating Contribution 104,493 90,892 195,618 168,428
General Corporate Expense (12,310) (13,128) (22,441) (22,117)
-------- -------- -------- --------
$ 92,183 $ 77,764 $173,177 $146,311
======== ======== ======== ========
10. RECENT ACCOUNTING PRONOUNCEMENT:
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 (SFAS 133), "Accounting for Derivative
Instruments and Hedging Activities". SFAS 133 establishes accounting and
reporting standards for derivative instruments and hedging activities, and is
effective January 1, 2000 for the Company. Based on its current level of
derivative instruments and hedging activities, the Company does not believe the
adoption of SFAS 133 will have a significant impact on its financial statements
or reported earnings.
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Results of Operations - (second quarter and first six months of 1998 compared to
the second quarter and first six months of 1997)
On August 7, 1997, the Company completed the spinoff of its Insurance Services
industry segment (Note 4). Accordingly, the results of operations information
presented below reflect only the continuing operations of the Company.
Revenue for the second quarter and first six months increased 14.7% and 14.0%
respectively over the comparable periods of 1997. After adjusting for the May
1997 divestiture of National Decision Systems, revenue was up 16.3% in the
quarter and 16.2% in the first six months, with approximately 6.8 percentage
points of the increase in both periods attributable to acquisitions. Operating
income of $92.2 million in the quarter and $173.2 million in the first six
months increased 18.5% and 18.4% respectively, over the prior year. This
increase is primarily the result of revenue growth and continued operating
leverage across all operating groups.
Excluding an after-tax gain of $17.9 million or $.12 per share from the sale of
National Decision Systems in May 1997, net income from continuing operations
increased 16.9% in the quarter and 16.5% year-to-date, and diluted earnings per
share from continuing operations increased 20.7% in the quarter and 20.0% year-
to-date. During the second quarter and first six months of 1998, the Company
expensed approximately $5.6 million ($3.6 million after tax or $.02 per share)
and $8.7 million ($5.2 million after tax or $.04 per share) respectively, in
costs related to modification of computer software for compliance with Year
2000. The Company expects that the total impact of these modification expenses
will be approximately $.08 to $.09 per share in 1998.
The following discussion analyzes operating results by industry segment (See
Note 9) and consolidated interest expense.
North American Information Services
- -----------------------------------
Revenue in North American Information Services, which includes U.S. Reporting
Services, U.S. Risk Management Services, Mortgage Information Services, Canadian
Operations, as well as National Decision Systems (divested in May 1997)
increased 7.2% in the quarter and 6.3% year-to-date. Excluding the divestiture,
revenue increased 10.0% in the quarter and 10.3% in the first six months with
3.8 and 3.2 percentage points of the respective increases attributable to
acquisitions. U.S. Reporting Services revenue was up 10.1% in the quarter and
11.1% year-to-date due to increased demand from the finance and
telecommunication/utility industries as well as growth in marketing services.
Although modest pricing pressures are expected to continue, average prices for
credit reports were up slightly in both periods. Revenue in U.S. Risk Management
Services was up 20.5% in the quarter and 15.7% year-to-date due to the May 1998
acquisition of CSC's collection business and continued growth in receivables
management outsourcing. Mortgage Information Services revenue increased $1.0
million in the quarter and $3.6 million year-to-date due to the favorable
interest rate environment.
Canadian revenues declined 3.4% in the second quarter and 4.1% in the first six
months due to unfavorable exchange rate movements. In local currency, revenues
were up slightly over the prior year in both periods, with gains in Reporting
Services being offset by declines in Risk Management revenue.
Operating income for North American Information Services increased 10.2% in the
quarter and 10.1% year-to-date due primarily to the revenue growth in U.S.
Reporting Services and U.S. Risk Management Services.
12
Payment Services
- ----------------
Revenue in Payment Services, which includes Card Services, Check Services, and
Card Software, increased 14.6% in the quarter and 11.6% in the first six months
over the comparable prior year periods. Card Services revenue was up 16.7% in
the quarter and 14.7% year-to-date with growth driven by increases in processing
of both cardholder and merchant transactions. Revenue growth in Card Services
was tempered by price reductions within the CSG-Madison operations where certain
cost savings achieved from converting these operations to the Company's card
processing system are being passed on to customers. Excluding these price
reductions, Card Services revenue increased approximately 23% in the quarter and
22% in the first six months. Second quarter and year-to-date revenue in Check
Services increased 8.0% and 6.6% respectively, due primarily to increased
volume. Card Software revenues were up in both periods.
Operating income increased 22.2% in the quarter and 21.2% year-to-date driven by
the revenue growth within Card Services and the operating leverage achieved from
the integration of the CSG-Madison operations, acquired in the fourth quarter of
1996. The growth in this segment's operating income was tempered by a modest
decline in operating income in Check Services due to a change in customer mix.
Equifax Europe
- --------------
Equifax Europe consists of operations primarily in the United Kingdom. During
the second quarter 1998, the Company increased its ownership in the operations
in Spain to 58% and obtained the control necessary to consolidate these
operations. Also, in the first quarter 1998, Equifax Europe acquired a risk
management services business in the U.K. Exclusive of these acquisitions,
revenue was up 16.7% in the quarter and 17.1% in the first six months, driven by
volume increases in U.K. Consumer Information Services and improved performance
across all industry groups.
Operating income for Equifax Europe increased 27.7% in the quarter and 36.1%
year-to-date driven by the operating leverage obtained from the revenue growth
and the continued integration of recent acquisitions. Operating income growth
for Equifax Europe was tempered in the second quarter due to higher expenses
related to modification of computer software for compliance with Year 2000.
Equifax Latin America
- ---------------------
Equifax Latin America consists of operations primarily in Chile and Argentina as
well as a developing operation in Mexico. The majority of the revenue increases
in both periods was due to the consolidation of the operations in Chile and
Argentina. In the first quarter of 1997, the Company owned 50% of Chile and
33.3% of Argentina and accounted for these operations under the equity method of
accounting. In April 1997, the Company increased its ownership in Chile to 100%
and began consolidating this operation. In December 1997, the Company increased
its investment in Argentina to 66.7% and, in early 1998, obtained the control
necessary to consolidate this operation.
Operating income for Equifax Latin America was up $1.8 million in the quarter
and $5.4 million year-to-date, due to the ownership increases in Chile and
Argentina and improved performance of the Argentina operations.
Other
- -----
This segment's revenue and operating income remained comparable between periods.
Its operations consist solely of a subcontract related to the Company's lottery
subsidiary.
Interest Expense
- ----------------
Interest expense increased $2.9 million in the quarter and $5.5 million year-to-
date due to the higher level of borrowings for acquisitions and share
repurchases.
13
FINANCIAL CONDITION
Net cash provided by operations for the first six months increased from $92.1
million in 1997 to $113.9 million in 1998 and working capital increased $126.0
million between years. Normal capital expenditures and dividend payments were
met with these internally generated funds.
Other significant outlays in the first six months included $63.3 million of
treasury stock purchases (Note 6) and $88.2 million (net of $5.6 million cash
acquired) for acquisitions (Note 8). These items were principally financed by an
increase in long-term debt and excess cash from operations. In June 1998, the
Company offered and sold $400 million in senior unsecured notes and debentures
(Note 5), with $250 million proceeds received in June and $150 million received
in July (before discounts and fees). Proceeds will be used to reduce borrowing
under the revolving credit facility and for the continued expansion of the
business. Cash and cash equivalents at June 30, 1998 were higher than the level
normally maintained due to the note proceeds and in anticipation of acquisitions
in Canada closing July 2nd that had a purchase price of approximately $46
million.
Capital expenditures for the remainder of 1998 are currently projected to be
approximately $70 million, exclusive of acquisitions. Additional expenditures
are possible as opportunities arise. As of June 30, 1998, approximately $160
million remained authorized under the Company's share repurchase program.
The remaining 1998 capital expenditures, exclusive of acquisitions, should be
met with internally generated funds. At June 30, 1998, $665 million was
available under the Company's $750 million revolving credit facility to fund
future capital requirements, including the possible purchase of the CSC credit
reporting businesses (Note 7). 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.
YEAR 2000 INFORMATION
The widespread use of computer software that relies on two digits, rather than
four digits, to define the applicable year may cause computers and computer-
controlled systems to malfunction when processing data across the year 2000
date. In view of the potential adverse impact of this "year 2000" issue on its
business, operations, and financial condition, the Company has established a
central function to coordinate and report on a continuing basis with regard to
the assessment, remediation planning, remediation plan implementation, and
contingency planning processes of the Company directed to "year 2000."
The Company is continuing its assessment of the impact of "year 2000" across its
business and operations, including its customer and vendor base. The Company
has completed the substantial majority of its assessments of its information
technology application systems. Further, the Company continues to develop and
implement remediation plans pursuant to established processes to avoid, or in
some instances reduce to an acceptable level, any adverse impact of "year 2000"
on its business and operations.
The Company believes it is devoting the resources necessary to achieve a level
of readiness that will meet its "year 2000" challenges in a timely manner.
Further, the Company believes its assessment, remediation planning, and plan
implementation processes will be effective to achieve "year 2000" readiness.
In 1997, Equifax expensed approximately two cents per share in connection with
"year 2000" assessment, remediation planning, and plan implementation. The
Company plans to expense approximately eight to nine cents per share in 1998 in
connection with its efforts to achieve "year 2000" readiness in advance of 2000.
The Company anticipates that most of its remaining costs allocable to the
remediation of its critical software systems will be expensed in 1998. Pending
completion of its "year 2000" assessments, the Company cannot as yet estimate
precisely the amounts that will be expensed after 1998 in connection with its
efforts to achieve "year 2000" readiness, but does not expect that those amounts
will be material.
14
FORWARD-LOOKING INFORMATION
Statements contained in this Form 10-Q may include "forward-looking statements"
within the meaning of the federal securities laws. These forward-looking
statements reflect management's current expectations and are based upon
currently available data. Actual results are subject to future events, risks
and uncertainties which could cause performance to differ materially from that
expressed or implied in these statements. Important factors that either
individually or in the aggregate could cause actual results to vary from those
expressed in the forward-looking statements are discussed in the "Forward-
Looking Information" section in the Management's Discussion and Analysis
included in the Company's annual report on Form 10-K for the year ended December
31, 1997.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
No material change since the end of the fiscal year.
15
PART II. OTHER INFORMATION
---------------------------
Item 4. Submission of Matters to a Vote of Security Holders
- ------- ---------------------------------------------------
(a) On April 29, 1998, the Company held its regular annual meeting
of Shareholders.
(b) Below is a brief description of each matter voted upon at the annual
meeting, each more fully described in that Definitive Proxy Statement,
dated March 24, 1998.
(i) Election of four Directors to serve terms of three years: Lee A.
Ault, III (127,089,110 votes "for" and 1,092,993 votes withheld);
John L. Clendenin (127,041,049 votes "for" and 1,141,054 votes
withheld); A. William Dahlberg (127,330,694 votes "for" and 851,409
votes withheld); and L. Phillip Humann (127,095,396 votes "for" and
1,086,707 votes withheld). The names of each other Director whose
term of office as a Director continued after this meeting are as
follows: Thomas F. Chapman, Robert P. Forrestal, Larry L. Prince,
Daniel W. McGlaughlin, D. Raymond Riddle, C. B. Rogers, Jr., Betty
L. Siegel, Ph.D. and Louis W. Sullivan, M.D.
(ii) Approval of Appointment of Arthur Andersen LLP as independent
public accountants of the Company for the year 1998 (127,238,345
votes "for"; 429,374 votes "against"; and 514,384 abstentions).
Item 5. Other Information
- ------- -----------------
For the 1999 Annual Meeting of Stockholders, any stockholder proposal that was
not submitted for inclusion in the proxy materials, but is intended to be
presented for action at the meeting, must be submitted to the Company no later
than February 9, 1999. If not received by February 9, 1999, proxies solicited
by the Company for that meeting may be voted on the proposal at the discretion
of the person or persons holding those proxies.
16
Item 6. Exhibits and Reports on Form 8-K
- ------- --------------------------------
(a) Exhibits
27 Financial Data Schedule, submitted to the Securities and Exchange
Commission in electronic format
(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: August 13, 1998 /s/Thomas F. Chapman
--------------------
Thomas F. Chapman, President
and Chief Executive Officer
Date: August 13, 1998 /s/Philip J. Mazzilli
---------------------
Philip J. Mazzilli
Corporate Vice President,
Treasurer and Controller
18
EXHIBIT INDEX
-------------
Exhibit Number Description of Index
-------------- --------------------
27 Financial Data Schedule, submitted to the Securities
and Exchange Commission in electronic format
19