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, 1999
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period ended _________________________
Commission File Number 1-6605
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EQUIFAX INC.
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(Exact name of registrant as specified in its charter)
Georgia 58-0401110
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(State or other jurisdiction of (I.R.S.Employer
incorporation or organization) Identification No.)
1600 Peachtree Street, N.W. Atlanta, Georgia
P.O. Box 4081, Atlanta, Georgia 30302
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(Address of principal executive offices) (Zip Code)
404-885-8000
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(Registrant's telephone number, including area code)
None
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(Former name, former address and former fiscal year, if changed
since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No _____
----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at March 31, 1999
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Common Stock, $1.25 Par Value 144,445,382
INDEX
Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets --
March 31, 1999 and December 31, 1998 2 - 3
Consolidated Statements of Income --
Three Months Ended March 31, 1999 and 1998 4
Consolidated Statement of Shareholders'
Equity -- Three Months Ended March 31, 1999 5
Consolidated Statements of Cash Flows --
Three Months Ended March 31, 1999 and 1998 6
Notes to Consolidated Financial Statements 7 - 10
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11 - 17
Item 3. Quantitative and Qualitative Disclosures About Market Risk 17
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K 18
1
PART I. FINANCIAL INFORMATION
-----------------------------
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
MARCH 31, DECEMBER 31,
(In thousands) 1999 1998
- -----------------------------------------------------------------------------------------------------------
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 117,478 $ 90,617
Trade accounts receivable, net 288,276 298,201
Other receivables 61,530 54,904
Deferred income tax assets 25,523 26,223
Other current assets 51,153 50,420
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Total current assets 543,960 $ 520,365
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PROPERTY AND EQUIPMENT:
Land, buildings and improvements 30,169 30,963
Data processing equipment and furniture 239,838 239,391
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270,007 270,354
Less accumulated depreciation 155,023 151,016
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114,984 119,338
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GOODWILL 620,651 719,662
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PURCHASED DATA FILES 162,341 173,473
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OTHER ASSETS 290,728 295,957
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$ 1,732,664 $ 1,828,795
=============== =============
The notes on pages 7 through 10 are an integral part of these consolidated
balance sheets.
2
CONSOLIDATED BALANCE SHEETS
MARCH 31, DECEMBER 31,
(In thousands, except par value) 1999 1998
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(Unaudited)
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term debt and current maturities of long-term debt $ 44,580 $ 47,387
Accounts payable 123,614 107,346
Accrued salaries and bonuses 24,887 37,973
Income taxes payable 18,625 9,518
Other current liabilities 193,793 216,955
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Total current liabilities 405,499 419,179
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LONG-TERM DEBT, LESS CURRENT MATURITIES 938,883 869,486
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LONG-TERM DEFERRED REVENUE 29,921 32,465
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DEFERRED INCOME TAX LIABILITIES 52,044 50,132
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OTHER LONG-TERM LIABILITIES 84,466 91,067
------------- -------------
COMMITMENTS AND CONTINGENCIES (Note 5)
SHAREHOLDERS' EQUITY:
Common stock, $1.25 par value; shares authorized - 300,000;
issued - 173,883 in 1999 and 173,722 in 1998;
outstanding - 138,513 in 1999 and 140,042 in 1998 217,354 217,153
Preferred stock, $0.01 par value; shares authorized -
10,000; issued and outstanding - none in 1999 or 1998 -- --
Paid-in capital 289,746 286,511
Retained earnings 593,773 562,911
Accumulated other comprehensive loss (Note 4) (153,639) (35,063)
Treasury stock, at cost, 29,438 shares in 1999
and 27,698 shares in 1998 (666,926) (606,092)
Stock held by employee benefits trusts, at cost,
5,933 shares in 1999 and 5,983 shares in 1998 (58,457) (58,954)
------------- -------------
Total shareholders' equity 221,851 366,466
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$ 1,732,664 $ 1,828,795
============= =============
The notes on pages 7 through 10 are an integral part of these consolidated
balance sheets.
3
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
(In thousands, except per share amounts) 1999 1998
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Operating revenue $ 421,504 $ 353,094
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Costs of services 248,758 201,970
Selling, general and administrative expenses 83,936 70,130
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Total operating expenses 332,694 272,100
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Operating income 88,810 80,994
Other income, net 482 721
Interest expense (15,135) (7,032)
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Income before income taxes 74,157 74,683
Provision for income taxes 30,256 29,948
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Net income $ 43,901 $ 44,735
=========== ==========
Per common share (basic):
Net income $ 0.32 $ 0.32
=========== ==========
Shares used in computing basic earnings per share 139,127 141,704
=========== ==========
Per common share (diluted):
Net income $ 0.31 $ 0.31
=========== ==========
Shares used in computing diluted earnings per share 141,656 144,812
=========== ==========
Dividends per common share $ 0.0900 $ 0.0875
=========== ==========
The notes on pages 7 through 10 are an integral part of these consolidated
statements.
4
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (UNAUDITED)
THREE MONTHS ENDED
(In thousands) MARCH 31, 1999
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COMMON STOCK:
Balance at beginning of period $ 217,153
Shares issued under stock plans 201
------------
Balance at end of period $ 217,354
============
PAID-IN CAPITAL:
Balance at beginning of period 286,511
Shares issued under stock plans 2,734
Other $ 501
------------
Balance at end of period $ 289,746
============
RETAINED EARNINGS:
Balance at beginning of period $ 562,911
Net income 43,901
Cash dividends paid (13,039)
------------
Balance at end of period $ 593,773
============
ACCUMULATED OTHER COMPREHENSIVE LOSS (Note 4):
Balance at beginning of period $ (35,063)
Adjustment during period (118,576)
------------
Balance at end of period $ (153,639)
============
TREASURY STOCK:
Balance at beginning of period $ (606,092)
Cost of shares repurchased (60,834)
------------
Balance at end of period $ (666,926)
============
STOCK HELD BY EMPLOYEE BENEFITS TRUSTS:
Balance at beginning of period $ (58,954)
Cost of shares reissued under stock plans 497
------------
Balance at end of period $ (58,457)
============
The notes on pages 7 through 10 are an integral part of this consolidated
statement.
5
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) THREE MONTHS ENDED
MARCH 31,
(In thousands) 1999 1998
- -----------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 43,901 $ 44,735
Adjustments to reconcile net income to net cash
cash provided by operating activities:
Depreciation and amortization 29,675 22,204
Changes in assets and liabilities:
Accounts receivable, net (5,091) (877)
Current liabilities, excluding debt (704) 6,928
Other current assets 1,489 (7,057)
Deferred income taxes 2,163 3,356
Other long-term liabilities, excluding debt (5,226) (8,472)
Other assets 3,282 4,493
------------ ------------
Net cash provided by operating activities 69,489 65,310
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment (8,845) (9,858)
Additions to other assets, net (20,041) (12,391)
Acquisitions, net of cash acquired (5,253) (27,737)
Investments in unconsolidated affiliates -- (2,200)
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Net cash used in investing activities (34,139) (52,186)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Net short-term borrowings (22) (7,568)
Net additions to long-term debt 68,032 89,312
Dividends paid (13,039) (12,945)
Treasury stock purchases (60,834) (63,262)
Proceeds from exercise of stock options 1,858 4,656
Other 694 573
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Net cash (used in) provided by financing activities (3,311) 10,766
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Effect of foreign currency exchange rates on cash (5,178) (71)
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Net cash provided 26,861 23,819
Cash and cash equivalents, beginning of period 90,617 52,251
------------ ------------
Cash and cash equivalents, end of period $ 117,478 $ 76,070
============ ============
The notes on pages 7 through 10 are an integral part of these consolidated
statements.
6
EQUIFAX INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MARCH 31, 1999
1. BASIS OF PRESENTATION:
The financial statements included herein have been prepared by the Company
pursuant to the rules and regulations of the Securities and Exchange Commission.
This information reflects all adjustments which are, in the opinion of
management, necessary for a fair presentation of the statement of financial
position of the Company as of March 31, 1999 and the results of operations and
cash flows for the three months ended March 31, 1999. 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, 1998.
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 7 for 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
and Brazil.
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:
TREASURY STOCK. During the first three months of 1999, the Company repurchased
approximately 1,740,000 of its common shares through open market transactions at
an aggregate cost of $60,834,000. As of March 31, 1999, approximately $250
million remained authorized for future share repurchases.
COMPREHENSIVE INCOME. Effective with the first quarter 1998, the Company adopted
FASB Statement No. 130, "Reporting Comprehensive Income". For the three month
periods ending March 31, 1999 and 1998, comprehensive income (loss) is as
follows:
Three Months Ended
March 31
(in thousands) 1999 1998
- -------------- ---- ----
Net income $ 43,901 $44,735
Change in cumulative foreign
currency translation adjustment (118,576) (190)
--------- -------
Comprehensive income (loss) $ (74,675) $44,545
========= =======
7
Accumulated other comprehensive loss at March 31, 1999 and December 31, 1998
consists of the following components:
(in thousands) March 31, 1999 December 31, 1998
- -------------- -------------- -----------------
Cumulative foreign currency
translation adjustment $(147,573) $(28,997)
Adjustment for minimum liability
under supplemental retirement plan (6,066) (6,066)
--------- --------
$(153,639) $(35,063)
========= ========
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 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.
6. ACQUISITIONS AND DIVESTITURE:
During the first three months of 1999, the Company acquired the credit files of
three affiliates located in the United States. They were accounted for as
purchases, had a total purchase price of $5.3 million, and were acquired for
cash. These acquisitions resulted in $.9 million of goodwill and $3.7 million of
purchased data files. Their results of operations have been included in the
consolidated statements of income from the dates of acquisition and were not
material.
Subsequent to March 31, 1999, the Company sold its 34% equity investment in
Proceda S.A. in Brazil, resulting in an immaterial gain.
7. 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". In
the first quarter, 1999, the Company changed its segment reporting structure to
more closely match management's internal reporting of business operations.
Significant changes included moving the check solutions businesses in Canada and
the U.K. (previously in the North American and Europe segments, respectively)
into Payment Services, and moving the operations of Equifax Secure, which is
developing authentication and digital certificate services, from General
Corporate Expense to the North American segment. The 1998 quarterly segment data
has been restated to conform with the current year presentation. Operating
revenue and operating income by industry segment for the first quarter of 1999
and 1998 and for the remaining restated quarters of 1998 are as follows (in
thousands):
8
1/st/ Quarter 2/nd/ Qtr 3/rd/ Qtr 4/th/ Qtr
------------
Operating Revenue: 1999 1998 1998 1998 1998
- ----------------- ---- ---- ---- ---- ----
North American Information Services $191,992 $180,307 $194,127 $200,355 $194,264
Payment Services 151,129 117,963 132,504 142,323 173,331
Equifax Europe 46,053 36,746 46,458 50,829 38,212
Equifax Latin America 29,921 15,669 17,966 29,498 40,790
Other 2,409 2,409 2,409 2,409 2,409
-------- -------- -------- -------- --------
$421,504 $353,094 $393,464 $425,414 $449,006
======== ======== ======== ======== ========
Operating Income (Loss):
- -----------------------
North American Information Services $ 65,679 $ 61,864 $ 68,069 $ 69,107 $ 67,549
Payment Services 28,637 19,235 23,970 27,510 38,600
Equifax Europe (1,688) 3,155 4,732 6,724 (17,352)
Equifax Latin America 4,187 4,186 4,346 6,046 6,830
Other 2,217 2,215 2,217 2,217 2,217
-------- -------- -------- -------- --------
Operating Contribution 99,032 90,655 103,334 111,604 97,844
General Corporate Expense (10,222) (9,661) (11,151) (11,957) (5,016)
-------- -------- -------- -------- --------
$ 88,810 $ 80,994 $ 92,183 $ 99,647 $ 92,828
======== ======== ======== ======== ========
Total assets by business segment at March 31, 1999 and December 31, 1998
(restated for the changes in segment reporting discussed above) are as follows:
March 31, December 31,
(in thousands) 1999 1998
- ------------- ---- ----
North American Information Services $ 555,060 $ 553,809
Payment Services 457,779 491,821
Equifax Europe 308,558 326,865
Equifax Latin America 274,911 341,834
Other 3,553 3,517
Corporate 132,803 110,949
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$1,732,664 $1,828,795
========== ==========
The declines in total assets within the Payment Services and Equifax Latin
American segments were due primarily to those segment's operations in Brazil,
where the currency dropped in value by approximately 31% between periods. The
decline in assets within Equifax Europe related primarily to the currency
exchange rate in the U.K., which declined about 3% between periods. The increase
in General Corporate assets related primarily to an increase in cash and cash
equivalents.
8. EARNINGS PER SHARE (EPS):
The income amount used in the numerator of the Company's EPS calculations is the
same for both basic and diluted EPS. A reconciliation of the average outstanding
shares used in the denominator of the calculations is as follows:
9
First quarter
-------------
(in thousands) 1999 1998
- ------------- ------ ------
Weighted average shares
outstanding (basic) 139,127 141,704
Effect of dilutive securities:
Stock options 2,232 2,815
Performance share plan 297 293
------- -------
Weighted average shares
outstanding (diluted) 141,656 144,812
======= =======
9. 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.
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Results of Operations - (first quarter of 1999 compared to the first quarter of
1998)
Revenue for the first quarter of 1999 increased 19.4% over the prior year, with
approximately 12.2 percentage points attributable to acquisitions. Operating
income of $88.8 million increased 9.7% over the prior year. This increase
resulted primarily from revenue improvements in the North American Information
Services and Payment Services segments.
Net income declined 1.9% to $43.9 million in the first quarter due to higher
interest expense, and diluted earnings per share were $0.31 in both periods.
During the first quarter, the Company expensed approximately $7.0 million ($4.2
million after tax or $0.03 per share) in costs related to the Company's "year
2000 program". The Company expects the total impact of its year 2000 program
will be approximately $0.10 per share in 1999.
The following discussion analyzes operating results for the Company's reportable
segments and consolidated interest expense.
North American Information Services
- -----------------------------------
Revenue in North American Information Services, which includes U.S. Credit
Information and Marketing Services, U.S. Risk Management Services, Mortgage
Information Services, Canadian Operations, Knowledge Engineering, Consumer
Direct, and Equifax Secure increased 6.5% in the first quarter with two
percentage points of the increase attributable to acquisitions. U.S. Credit
Information and Marketing Services revenue was up 7.0% in the quarter due to
increased demand from telecommunication/utility industry customers as well as
growth in marketing services. The first quarter increase also benefited from
higher volumes associated with mortgage refinancing activities due to the
favorable interest rate environment. Average prices for credit reports declined
slightly in the first quarter and modest pricing pressures are expected to
continue. Revenue in U.S. Risk Management Services was up 5.8% in the quarter
due primarily continued growth in receivables management outsourcing, while
Mortgage Information Services revenue increased $2.2 million due to higher
volumes from increased market share.
Canadian revenues were relatively level with 1998 due to unfavorable exchange
rate movements. In local currency, first quarter revenues were up 6.2% over the
prior year. Exclusive of acquisitions, Canadian revenues were level with the
prior year with gains in Risk Management Services and Commercial Services being
offset by a decline in Reporting Services.
Operating income for North American Information Services increased 6.2% in the
quarter due primarily to the revenue growth in U.S. Credit Information and
Marketing Services. This growth was tempered by increased developmental expenses
within Equifax Secure related to the development of remote authentication and
digital certificate services as well as increased investment in Knowledge
Engineering. Absent these investments, operating income increased approximately
12%. Additionally, increased expenses related to the year 2000 efforts in the
U.S. and Canada also tempered growth in this segment's operating income in the
first quarter.
Payment Services
- ----------------
Payment Services consists of Card Solutions, Check Solutions and Card Software.
In September 1998, Payment Services expanded its operations into Latin America
by acquiring a 59.3% interest in UNNISA, a card services business in Brazil.
Exclusive of this acquisition, Payment Services revenue was up 17.1% in the
first quarter, with
11
Card Solutions revenue increasing 12.2% due to growth in processing of both
cardholder and merchant transactions. Check Solutions first quarter revenue
increased 9.0% over the prior year with a 9.7% increase in U.S. revenue and a
9.2% in U.K. revenue partially offset by a slight decline in Canadian revenue.
Operating income increased 48.9% in the quarter primarily as a result of the
license sales from Card Software and continued revenue growth within Card
Solutions and Check Solutions. The Brazilian operation was slightly dilutive to
this segment's operating income in the first quarter.
In April 1999, Card Services for Credit Unions (CSCU) extended its card
processing contract with Card Solutions through 2004. This contract has
estimated revenue of $500 million over the five year period. Also in April, the
Company sold its 34% investment in Proceda S.A., an information technology
company that provides data processing services to UNNISA and other Brazilian
companies.
Equifax Europe
- --------------
Equifax Europe consists of operations primarily in the United Kingdom and Spain.
During the second quarter 1998, the Company increased its ownership in the
operations in Spain and obtained the control necessary to consolidate these
operations. While the slowdown in the U.K. economy continued to effect core
revenue growth, Equifax Europe's first quarter revenue was up 25.3% over the
prior year due to acquisitions. Exclusive of acquisitions, this segment's
revenue declined 5.9% in the quarter as increases in consumer credit information
and marketing services revenue were more than offset by declines in revenue from
commercial credit information services and auto lien information services. The
decline in auto lien information services resulted from a slowdown in vehicle
sales and increased competition within this market.
This segment reported an operating loss of $1.7 million in the first quarter
compared to operating income of $3.2 million in the prior year. The operating
loss in 1999 resulted from the revenue decline in conjunction with a higher
expense base. Acquisitions had a minimal impact on first quarter results. The
first quarter loss is a significant improvement from the loss in the fourth
quarter of 1998 and the Company expects continued improvement in this segment's
expense base and operating results throughout 1999, with a return to
profitability in the third quarter.
Equifax Latin America
- ---------------------
Equifax Latin America consists of consumer and commercial information companies
predominantly located in Brazil, Chile and Argentina. Equifax Latin America also
has a developing operation in Mexico, and has a majority interest in credit
information companies in Peru and El Salvador. Most of this segment's first
quarter revenue increase was due to the August 1998 acquisition of an 80%
interest in SCI in Brazil. Exclusive of this acquisition, segment revenue
increased 3.5%. Revenue in Argentina was adversely impacted by the Brazilian
economy and was down slightly in the quarter. Unfavorable exchange rates
tempered revenue growth in Chile; however, in local currency revenue increased
5.3% exclusive of acquisitions.
This segment's first quarter operating income was virtually the same between
years as income from the Brazilian acquisition was offset by higher
developmental expenses within Latin America.
In local currency, the overall performance of the Brazilian operation has
exceeded management's expectations and the Company continues to streamline and
integrate the operations of this recent acquisition.
Other
- -----
This segment's revenue of $2.4 million in both 1999 and 1998 is due to a
subcontract, expiring in 2002, related to the Company's lottery subsidiary.
Operating income was $2.2 million in both periods.
12
Interest Expense
- ----------------
Interest expense increased $8.1 million in the quarter due to the higher level
of borrowings for acquisitions and share repurchases.
FINANCIAL CONDITION
Net cash provided by operations increased from $65.3 million in the first
quarter of 1998 to $69.5 million in the first quarter of 1999, and working
capital increased $37.3 million between periods. Normal capital expenditures and
dividend payments were met with these internally generated funds.
Other significant outlays in the first quarter included $60.8 million of
treasury stock purchases (Note 4) and $5.3 million for acquisitions (Note 6).
These items were financed by a $68.0 million increase in long-term debt,
primarily from additional borrowings under the Company's $750 million revolving
credit facility.
Capital expenditures for 1999 are currently estimated to be approximately $120
million, with $28.9 million spent in the first quarter. Additional expenditures
are possible as opportunities arise. At March 31, 1999, approximately $250
million remained authorized under the Company's share repurchase program, and
purchases have continued in the second quarter.
The remaining 1999 capital expenditures, exclusive of acquisitions, should be
met with internally generated funds. At March 31, 1999, $434 million remained
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 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.
YEAR 2000 INFORMATION
1. Background. 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 or incorrectly
process data as we approach and enter the year 2000. In view of the
potential adverse impact of these "year 2000 problems" on our business,
operations and financial condition, we have implemented a central function
to manage, validate and report on a continuing basis to the Company's
executive management and Board of Directors with regard to our "year 2000
program." Our year 2000 program process comprises five continuing
activities: (a) identification and assessment, (b) remediation planning,
(c) remediation, (d) testing, and (e) contingency planning for year 2000
problem failures.
2. The Company's Year 2000 Focus. We have focused our year 2000 program
-----------------------------
primarily in the following areas: (a) our information technology systems,
which include (i) internally developed business applications software, (ii)
software provided by vendors and (iii) the computer and peripheral hardware
used in our operations; (b) electronic data interchange systems; (c) non-
information technology systems (embedded technology) including office
business machines, and security, backup power and other building systems;
and (d) the flow of materials and non-information technology services from
our vendors.
3. Readiness and Plans. This section describes the status of our year 2000
-------------------
program activities:
(a) Information Technology Systems.
------------------------------
We have completed our year 2000 identification, assessment and
remediation planning activities for the application software and host
environments (operating systems software and hardware) of our critical
information technology systems, including our systems for North
American Information Services, Payment Services, Equifax Europe,
Equifax Latin America and our central
13
corporate functions. Regarding remediation and testing, the status is
as follows:
(1) We have completed remediation and internal testing (internal
application testing with current and future dates) for all of the
critical information technology systems of our North American
Information Services businesses, except for a small minority of
customer-specific programs for processing data input. With
respect to those programs, we are dependent on specifications yet
to be provided by those customers; those specifications are
scheduled to be provided in a timely manner to allow us to
complete those remaining programs no later than the fourth
quarter.
(2) We have completed remediation for all of the critical information
technology systems of our Payment Services businesses, except for
our Brazilian card processing business acquired in August 1998.
With respect to that business, we have begun converting the card
processing accounts of our customers to two new systems
(including our proprietary card processing system) that will
replace the current system. We have installed both new systems,
written to be year 2000 ready, and expect to complete
substantially all internal testing and, except for one
significant customer, account conversions by September 1999.
(That one customer has required that we delay conversion of its
accounts until next year; to accommodate that customer, we are
remediating our current system, and plan to complete that
remediation and internal testing by June 1999.)
With respect to our U.S. card services business, we have
completed substantially all of our internal testing on a majority
of our critical information technology systems. Those systems
for which we have significant remaining internal testing were
modified over the last several months to conform to recent
changes in Visa and MasterCard rules and regulations unrelated to
year 2000. We plan to complete the remaining internal testing of
those modified systems by the third quarter of 1999.
With respect to our check services business, we plan to complete
the remainder of our internal testing by June 1999 for our North
American business, and we plan to complete internal testing by
September 1999 for our international check business.
(3) We have completed remediation of our critical information
technology systems for Equifax Europe. We have completed
substantially all internal testing with current dates; we
currently are conducting future date testing as part of
enterprise testing (internal end-to-end cross-functional
testing), and plan to complete that testing by August 1999.
(4) We have completed remediation and substantially all internal
testing of our critical information technology systems in Latin
America, except for our Brazilian information reporting business
acquired August 1998. With respect to our Brazilian information
reporting business, we plan to complete remediation by June 1999
and internal testing by July 1999.
(5) We have completed remediation and internal testing of our
central, corporate financial, human resources and payroll systems
in the U.S. With respect to our non-U.S. financial, human
resources and payroll systems, we are upgrading or migrating them
to third party systems written to be year 2000 ready. We have
completed substantially all of that process, and have commenced
internal testing of those new systems. We plan to complete the
process, including internal testing, by July 1999.
In order to obtain further assurance of year 2000 readiness of our
critical information technology systems, we are conducting additional
layers of testing of those systems beyond internal testing,
14
as we deem appropriate under the circumstances. We have commenced
customer testing (future date application testing with the customer)
with many of our more significant customers, and intend to continue
that throughout the year as we deem appropriate. With regard to a
substantial majority of our critical information technology systems,
we have either completed or are in the process of completing test
plans for enterprise testing (internal end-to-end cross-functional
testing). We plan to commence enterprise testing in May 1999, and to
continue into the third quarter as we deem appropriate. Further, we
plan to conduct selected external end-to-end testing with targeted
customers during the third quarter and into the fourth quarter.
We have completed the identification, assessment and remediation
planning activities with regard to the other elements of our critical
information technology systems (including our local area networks and
desktop computing environments). We plan to complete the remediation
and testing activities associated with those elements by August 31,
1999.
We concurrently are addressing year 2000 issues with respect to our
non-critical information technology systems, and believe their level
of readiness will be sufficient to avoid any material impact on the
Company's business, operations or financial condition.
The majority of our information technology systems for North American
Information Services and Equifax Europe are operated at data centers
managed by IBM Global Services. IBM continues to assist us in
achieving year 2000 readiness for our data processing operating
environments in the IBM Global Services data centers.
(b) Electronic Data Interchange Systems.
-----------------------------------
We are working with others with whom we engage in electronic data
interchange (including vendors, customers and other data suppliers),
and with our network telecommunications service providers, to
identify, assess and test for potential year 2000 problem failures in
our electronic data interchange systems. As part of those efforts, we
continue our contacts with our data interchange vendors and critical
network telecommunications service providers to assess their state of
year 2000 readiness and determine the potential for year 2000 problem
failures resulting from their equipment, networks or application
systems. We are in testing with the majority of our data interchange
vendors, and we continue to monitor the carrier reporting and testing
information being published by industry organizations such as Network
Forum (U.S. local service providers) and ITU (International
Telecommunications Union). We continue to review readiness analyses
published by consulting organizations, such as Gartner and Forrester,
and consultant reviews in relevant industry publications, pertaining
to telecommunications service providers. We believe that this process
will be ongoing throughout 1999, as we develop additional information
regarding those systems. In cases where we determine that the risks
associated with particular service providers are not acceptable, we
believe that we will be able to timely migrate to satisfactory
alternative delivery systems.
We have completed the identification, assessment and remediation
planning activities for Company owned hardware components of our
critical network telecommunications systems, and we are remediating
those components as appropriate. We anticipate completing integrated
testing of our internal network components with current and future
dates in June 1999. We expect to make network hardware replacements
and firmware upgrades to address those concerns identified by August
1999.
Overall, we believe that our electronic data interchange systems will
be year 2000 ready as necessary to avoid any material adverse impact
on the Company's business, operations or financial condition.
15
(c) Non-Information Technology Systems.
----------------------------------
We have completed a substantial majority of our ongoing
identification, assessment and remediation planning for the year 2000
problem failures that may occur in our non-information technology
systems resulting from embedded technologies, including office
business machines, and security, backup power and other building
systems. We have completed the substantial majority of our
remediation and testing of those systems and anticipate ongoing
testing throughout 1999.
(d) Materials and Services.
----------------------
We have distributed surveys to our materials and non-information
technology services vendors that support our material operations
requesting disclosure of their year 2000 readiness status and their
plans for addressing year 2000 problems relating to those goods and
services and any applicable delivery systems. We have requested and
will request additional assurances (including in some instances audit
and test activities) from our critical vendors that their goods,
services and delivery systems will be appropriately and timely year
2000 ready to meet our continuing needs. If any vendor is unable or
unwilling to provide appropriate assurances, we believe that we will
be able to use alternative vendors or otherwise modify our services in
a manner that will avoid any material impact to the Company. While we
believe we will complete a substantial majority of those activities by
June 1999, they will continue throughout 1999.
4. Costs to Address.
----------------
We estimate that the cost of our year 2000 program activities will be $56
million. Through March 31, 1999, we have incurred costs of approximately
$38 million related to those activities. Regarding our annual per share
charges, we expensed approximately one cent per share in 1996, two cents
per share in 1997, and ten cents per share in 1998 in connection with our
year 2000 program activities, and we plan to expense approximately ten
cents per share in 1999. In addition to costs and expenses of outside
consultants, programmers and professional advisors, and acquired hardware
and software, the above figures include direct costs associated with
Company information technology employees working on our year 2000 program
and some of the Company's non-information technology employees who are
devoting significant time to the year 2000 program.
5. Business Continuity and Contingency Planning.
--------------------------------------------
We continue the process of identifying the reasonably likely year 2000
problem failures that we could experience with the goal of revising, to the
extent practical, our existing business continuity and contingency plans to
address the internal and external issues specific to those problems. Thus
far, we have focused as planned on reviewing our critical business
processes. We believe we have identified the substantial majority of the
potential material problem failures with respect to those critical
processes, and we have documented strategies for mitigating the associated
risk. We expect to revise our existing business continuity and contingency
plans by June 1999 to reflect those strategies. The strategies and
supporting plans, which are intended to enable us to continue to operate,
include performing certain processes manually; repairing or obtaining
replacement systems; changing suppliers; and reducing or suspending certain
non-critical aspects of our operations. However, we believe that, due to
the widespread nature of potential year 2000 problems and our dynamic
business growth, the contingency planning process must be ongoing as we
continue to monitor year 2000 developments and our internal and external
business environment.
16
6. Possible Consequences of Year 2000 Problems.
-------------------------------------------
We believe that we have put in place the processes and are devoting the
resources necessary to achieve a level of readiness to meet our year 2000
challenges in a timely and appropriate manner. However, there can be no
assurance that our internal systems or the systems of others on which we
rely will be year 2000 ready in a timely and appropriate manner or that our
contingency plans or the contingency plans of others on which we rely will
mitigate the effects of year 2000 problem failures. Currently, we believe
the most reasonably likely worst case scenario would be a sustained,
concurrent failure of multiple critical systems (internal and external)
that support our operations. While we do not expect that scenario to occur,
that scenario if it occurs could, even despite the successful execution of
our business continuity and contingency plans, result in the reduction or
suspension of a material portion of our operations and accordingly have a
material adverse effect on our business and financial condition.
The preceding "Year 2000 Information" discussion contains various forward-
looking statements that represent our beliefs or expectations regarding
future events. When used in the "Year 2000 Information" discussion, the
words "believes," "expects," "estimates," "plans," "goals" and similar
expressions are intended to identify forward-looking statements. Forward-
looking statements include, without limitation, our expectations as to when
we will complete the identification and assessment, remediation planning,
remediation and testing activities of our year 2000 program as well as our
year 2000 contingency planning; our estimated cost of achieving year 2000
readiness; and our belief that our internal systems and equipment will be
year 2000 ready in a timely and appropriate manner. All forward-looking
statements involve a number of risks and uncertainties that could cause the
actual results to differ materially from the projected results. Factors
that may cause those differences include availability of information
technology resources; customer demand for our products and services;
continued availability of materials, services and data from our suppliers;
the ability to identify and remediate all date sensitive lines of computer
code and to replace embedded computer chips in affected systems and
equipment; the failure of others to timely achieve appropriate year 2000
readiness; and the actions or inaction of governmental agencies and others
with respect to year 2000 problems.
FORWARD-LOOKING INFORMATION
Statements in this report that relate to Equifax's future plans, objectives,
expectations, performance, events and the like are "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995 and
the Securities Exchange Act of 1934. Future events, risks and uncertainties,
individually or in the aggregate, could cause actual results to differ
materially from those expressed or implied in these statements. Those factors
could include changes in worldwide and U.S. economic conditions that materially
impact consumer spending and consumer debt, changes in demand for the Company's
products and services, risks associated with the integration of acquisitions and
other investments, and other factors discussed in the "Forward-looking
Information" and "Year 2000 Information" sections in the management's discussion
and analysis included at item 7 in the Company's annual report on Form 10-K for
the year ended December 31, 1998.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company does not have material market risk exposure from market risk
sensitive instruments.
17
PART II. OTHER INFORMATION
--------------------------
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
A list of exhibits included as part of this report is set forth
in the Exhibit Index appearing elsewhere in this report, and is
incorporated by reference.
(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.
EXHIBIT INDEX
-------------
Exhibit Number Description of Exhibit
-------------- ----------------------
3 . Bylaws (as amended May 6, 1999)
27 . Financial Data Schedule, submitted to the Commission in
electronic format
18
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned duly authorized officers.
EQUIFAX INC.
(Registrant)
Date: May 14, 1999 /s/Thomas F. Chapman
--------------------------------------------------
Thomas F. Chapman
Chairman, President, and Chief Executive Officer
Date: May 14, 1999 /s/Philip J. Mazzilli
--------------------------------------------------
Philip J. Mazzilli
Corporate Vice President,
Treasurer and Controller
(Chief Accounting Officer)
19