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Dun & Bradstreet 10-K 2009 Documents found in this filing:
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549
Form 10-K
Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the Fiscal Year Ended December 31, 2008 Commission file number 1-15967
The Dun & Bradstreet Corporation (Exact name of registrant as specified in its charter)
Registrant’s telephone number, including area code: (973) 921-5500
Securities registered pursuant to Section 12(b) of the Act:
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes x No ¨ Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes ¨ No x 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 by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨ Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer” and large “accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x As of June 30, 2008, the aggregate market value of all shares of Common Stock of The Dun & Bradstreet Corporation outstanding and held by nonaffiliates* (based upon its closing transaction price on the New York Stock Exchange Composite Tape on June 30, 2008) was approximately $4.752 billion. As of January 31, 2009, 53,382,309 shares of Common Stock of The Dun & Bradstreet Corporation were outstanding. Documents Incorporated by Reference Portions of the registrant’s definitive proxy statement for use in connection with its annual meeting of shareholders scheduled to be held on May 5, 2009, are incorporated into Part III of this Form 10-K.
Table of ContentsINDEX
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Table of ContentsPART I
Overview The Dun & Bradstreet Corporation (“D&B” or “we” or “our” or the “Company”) is the world’s leading source of commercial information and insight on businesses, enabling customers to Decide with Confidence® for over 167 years. Our global commercial database contains more than 140 million business records. The database is enhanced by our proprietary DUNSRight® Quality Process, which provides our customers with quality business information. This quality information is the foundation of our global solutions that customers rely on to make critical business decisions. D&B provides solution sets that meet a diverse set of customer needs globally. Customers use D&B Risk Management Solutions™ to mitigate credit and supplier risk, increase cash flow and drive increased profitability; D&B Sales & Marketing Solutions™ to increase revenue from new and existing customers; and D&B Internet Solutions™ to convert prospects into clients faster by enabling business professionals to research companies, executives and industries. Our Aspiration and Our Strategy In October 2000, we launched a business strategy called the “Blueprint for Growth.” This strategy has been successful in driving our performance over the past years. In September 2006, we updated our Blueprint for Growth strategy and articulated our strategic choices for the future. We further refined this strategy in July 2008. Our updated strategy reflects that D&B is a company that has been and remains committed to delivering Total Shareholder Return (“TSR”). To achieve this objective, we remain focused on three key drivers of TSR, which include: growing revenue; expanding margins; and maintaining a disciplined approach to deploying our free cash flow. These have been the central drivers of our success and they will remain the key areas of focus for us going forward in order to help ensure consistent performance over time. With regard to our 2008-2010 growth objectives, it is fair to say we are not in normal economic times. So at the moment, we are focused on delivering our best, one year at a time. To grow revenue, we have made a fundamental strategic choice to remain focused on the commercial marketplace and to continue being the world’s largest and best provider of insight about businesses. This is reflected in our aspiration, which is “To be the most trusted source of commercial insight so our customers can Decide with Confidence.” Within the commercial insight market, we have identified three strategic stakes to increase growth for the future. We continue to execute against these stakes, which include:
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Table of ContentsIn executing against these strategic stakes, we are focused on growing our RMS, S&MS and Internet Solutions businesses both organically—by investing in areas such as data and technology—and by pursuing acquisitions. Our Blueprint for Growth strategy relies on four core competitive advantages that support our commitment to driving TSR and our aspiration to be the most trusted source of commercial insight so our customers can Decide with Confidence. These core competitive advantages include our:
For the reasons described below, we believe that these core competitive advantages will continue to drive our growth and profitability going forward. Trusted Brand The D&B® brand is steeped in tradition that dates back to the founding of our company in 1841. We believe that the D&B brand is unique in the marketplace, standing for trust and confidence in commercial insight; our customers rely on D&B and the quality of our brand when they make critical business decisions. Financial Flexibility Financial Flexibility is an ongoing process that reallocates our spending from low-growth or low-value activities to activities that will create greater value for shareholders through enhanced revenue growth, improved profitability and/or quality improvements. As part of this process, we view almost every dollar that we spend as flexible. What this means is that we view little of our costs as fixed—we make a conscious decision about every investment we make. By approaching our cost base in this way, we are able to continually and systematically identify ways to improve our performance in terms of quality and cost. In executing our Financial Flexibility process we seek to eliminate, standardize, consolidate and automate our business functions. Winning Culture Our culture is focused on developing strong leaders, because we believe that great leadership drives great results, improves customer satisfaction and helps increase TSR. To build such leadership, we have developed and deployed a consistent, principles-based leadership model throughout our Company. Our quarterly leadership development process ensures that team member performance goals and financial rewards are linked to our Blueprint for Growth strategy. In addition, we link a component of the compensation of each of our senior leaders to our overall financial results. Our leadership development process also enables team members, which include our management and employees, to receive ongoing feedback on their performance goals and on their leadership. All team members are expected to have personal leadership action plans that are focused on their own personal development, building on their leadership strengths and working on their areas of development. We have a talent assessment process that provides a framework to assess and improve skill levels and performance across the organization and which acts as a tool to aid talent development and succession planning. We also administer an employee engagement survey that enables team members worldwide to provide feedback on areas that will improve their performance, drive customer satisfaction and evolve our winning culture. DUNSRight Quality Process DUNSRight is our proprietary quality process that powers all of our customer solution sets and serves as our key strategic differentiator as a commercial insight company.
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Table of ContentsThe foundation of our DUNSRight Quality Process is Quality Assurance, which includes over 2,000 separate automated and manual checks to ensure that data meets our high quality standards. In addition, our five DUNSRight Quality Drivers work sequentially to enhance the data and make it useful to our customers in making critical business decisions. The process works as follows:
Segments We have historically managed and reported our business globally through two segments:
We continue to manage our business through two segments. However, as of January 1, 2009, Canada has been moved out of our International segment and into our renamed “North America” segment (formerly our U.S. segment). Therefore, on January 1, 2009, we began managing our operations through two segments: North America (which consists of the U.S. and Canada) and International (which consists of our operations in Europe, Asia Pacific and Latin America). We will report financial results in this new segment structure beginning with the results for the first quarter of 2009 and conform historical amounts to reflect the new segment structure. U.S. Our U.S. segment accounted for 77%, 78% and 79% of our total revenue for the years ended December 31, 2008, 2007 and 2006, respectively. International. We conduct business internationally through our wholly-owned subsidiaries, joint ventures that we either control or hold a majority interest in, independent correspondents, strategic relationships through our D&B Worldwide Network® and minority equity investments. The International segment, which primarily represents revenue generated through our subsidiaries, accounted for 23%, 22% and 21% of our total revenue for the years ended December 31, 2008, 2007 and 2006, respectively. Since the launch of the Blueprint for Growth strategy, we have entered into strategic relationships with strong local players throughout the world that we do not control and who have become part of our D&B Worldwide Network, operating under commercial agreements. Our D&B Worldwide Network enables our customers globally to make business decisions with confidence, because we incorporate data from the members of the D&B Worldwide Network that has been put through the DUNSRight Quality Process into our database and utilize it in our customer solutions. Our customers, therefore, have access to a more powerful database and global solution sets they can rely on to make their risk management, sales and marketing decisions. Over the last few years, we have strengthened our position in our International segment through majority-owned joint ventures such as we did, for example, in Japan, China and India.
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Table of ContentsIn addition, we have from time-to-time acquired complementary businesses, products and technologies. For example:
Segment data and other information for the years ended December 31, 2008, 2007 and 2006 are included in Note 14 to our consolidated financial statements included in Item 8. of this Annual Report on Form 10-K. Our Customer Solutions and Services Risk Management Solutions Risk Management Solutions is our largest customer solution set, accounting for 64%, 64% and 66% of our total revenue for the years ended December 31, 2008, 2007 and 2006, respectively. Within this customer solution set we offer traditional and value-added solutions. Our traditional solutions, which consist of reports from our database used primarily for making decisions about new credit applications, constituted 75% of our Risk Management Solutions revenue and 48% of our total revenue for the year ended December 31, 2008. Our value-added solutions, which constituted 20% of our Risk Management Solutions revenue and 13% of our total revenue for the year ended December 31, 2008, generally support automated decision-making and portfolio management through the use of scoring and integrated software solutions. See Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations of this Annual Report on Form 10-K for a discussion of trends in this customer solutions set. On January 1, 2008, we began managing our Supply Management business as part of our Risk Management Solutions business. This is consistent with our overall strategy and also reflects customers’ needs to better understand the financial risk of their supply chain. As a result, the contributions of the Supply Management business are now reported as a part of Risk Management Solutions, as set forth above. Our Risk Management Solutions help customers increase cash flow and profitability while mitigating credit, operational and regulatory risks by helping them answer questions such as:
Our principal Risk Management Solutions are:
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Certain of our solutions are available on a subscription pricing basis in the U.S., such as our Preferred Pricing Agreement with DNBi, and in certain of our International markets. Our subscription pricing plans, which continue to represent an increasing proportion of our revenue, provide increased access to our Risk Management reports and data to help customers increase their profitability while mitigating their risk. Sales & Marketing Solutions Sales & Marketing Solutions is our second-largest customer solution set accounting for 29%, 29% and 28% of our total revenue for the years ended December 31, 2008, 2007 and 2006, respectively. Within this customer solution set we offer traditional and value-added solutions. Our traditional solutions generally consist of marketing lists, labels and customized data files used by our customers in their direct mail and marketing activities. These solutions constituted 40% of our Sales & Marketing Solutions revenue and 11% of our total revenue for the year ended December 31, 2008. Our value-added solutions generally include decision-making and customer information management solutions. These value-added solutions constituted 60% of Sales & Marketing Solutions revenue and 18% of our total revenue for the year ended December 31, 2008. See Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations of this Annual Report on Form 10-K for a discussion of trends in this customer solutions set. Our Sales & Marketing Solutions help customers increase revenue from new and existing customers by helping them answer questions such as:
Our principal Sales & Marketing Solutions are:
Internet Solutions Our Internet business provides highly organized, efficient and easy-to-use products that address the online business information needs of professionals and small businesses, such as finding information on companies, customers and prospects, and researching how to start up and manage a business.
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Table of ContentsInternet Solutions represents the results of our Hoover’s business, including the First Research division of Hoover’s, and AllBusiness.com business. Internet Solutions accounted for 7%, 7% and 6% of our total revenue for the years ended December 31, 2008, 2007 and 2006, respectively. See Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations of this Annual Report on Form 10-K for a discussion on trends in this customer solutions set. Internet business growth will come from two sources—our existing Hoover’s business, which addresses the critical business information needs of sales professionals, and other Internet opportunities that target the needs of new professional segments and small businesses. Hoover’s provides information on public and private companies, and their executives and industries, primarily to senior executives and sales professionals worldwide. The database includes industry and company briefs, information on competitors, corporate financials, executive contact information, current news and research and analysts reports. Hoover’s subscribers primarily access the data online via Hoover’s Online®. First Research is a leading Internet provider of editorial-based industry insight, specifically tailored toward sales professionals. Through this acquisition, D&B has been able to enhance its Hoover’s solutions with deeper industry-specific content, providing sales professionals with higher quality data and more comprehensive insight. AllBusiness.com is an online media and e-commerce company that leverages its proprietary publishing platform and a broad range of content to help users run their small businesses. AllBusiness.com operates one of the leading business information sites on the Internet. Its content helps professionals save time and money by addressing real-world business questions and presenting practical solutions. Our Internet Solutions help customers convert prospects to clients faster by helping them answer questions such as:
Our principal Internet Solutions are:
Our Sales Force We rely primarily on our sales force of approximately 2,100 team members worldwide to sell our customers solutions, of which approximately 1,500 were in our U.S. segment and 600 were in our International segment as of December 31, 2008. Our sales force includes relationship managers and solution specialists who sell to our large and middle market customers, teams of telesales people who sell to our small business customers and a team that sells to resellers of our solutions and our data.
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Table of ContentsOur global sales force is another source of competitive advantage, which allows us go to market across three key customer segments. First, large customers, which spend $1.0 million or more per year; second, middle market customers, which spend between $20,000 and $1.0 million per year; and third, small businesses, which spend less than $20,000 per year. To tap into additional growth opportunities across these three market segments, in July 2008 we announced plans to increase our global sales force by approximately 10 percent, almost all of which we completed in 2008, and our investment in global sales force expansion is ongoing. Our Customers We believe that different size customers have different needs and require different skill sets to service them. Accordingly, we have adopted a go-to-market sales strategy that focuses on distinct groups categorized internally as large customers, middle market customers and small business customers, as described above. Our principal customers within these groups are banks and other credit and financial institutions, manufacturers, wholesalers, insurance companies and telecommunication companies, as well as sales, marketing and business development professionals. None of our customers accounted for more than 1% of our 2008 total revenue or of the revenue of our U.S. or International segments. Accordingly, neither we nor either of our segments is dependent on a single customer or a few customers, such that a loss of any one would have a material adverse effect on our consolidated annual results of operations or the annual results of either of our segments. Competition We are subject to highly competitive conditions in all aspects of our business. A number of competitors are active in specific aspects of our business. However, we believe no competitor offers our complete line of solutions or can match our global data quality resulting from our DUNSRight Quality Process. In the U.S., we are a market leader in our Risk Management Solutions business in terms of market share and revenue, including revenue from sales of third-party business credit information. We compete with our customers’ own internal business practices by continually developing more efficient alternatives to our customers’ risk management processes to capture more of their internal spend. We also directly compete with a broad range of companies, including consumer credit companies such as Equifax, Inc. and Experian Information Solutions, Inc. (“Experian”), which have traditionally offered primarily consumer information services, but now offer products that combine consumer information with business information as a tool to help customers make credit decisions with respect to small businesses. We also compete in the U.S. with a broad range of companies offering solutions similar to our Sales & Marketing Solutions and Supply Management business as well as our customers’ own purchasing departments. In our Sales & Marketing Solutions business, our direct competitors include companies such as Experian and infoGROUP (“infoUSA”). In our Internet Solutions, Hoover’s competition varies based on the size of the customer and the level of spending available for services such as Hoover’s Online. On the high end of product pricing, Hoover’s Researcher, Hoover’s Prospector and Hoover’s Relationship Manager products compete with other business information providers such as infoUSA. On the lower end of product pricing, our Hoover’s Lite solution mainly competes with advertising-supported Internet sites and other free or low-priced information sources, such as Yahoo! Finance and MarketWatch, Inc. Outside the U.S., the competitive environment varies by country. For example, in Europe, our direct competition is primarily local, such as Experian in the United Kingdom (“UK”) and Cerved in Italy. In addition, common links exist among some of these competitors through their membership in European information network alliances, such as BIGNet (Experian), and we believe that competitors may be pursuing the establishment of their own pan-European network through direct investment (e.g., Coface). However, we believe we offer superior solutions when compared to these networks because of our DUNSRight Quality Process. In addition, the Sales & Marketing Solutions landscape is both localized and fragmented throughout Europe, where numerous local players of varying size compete for business.
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Table of ContentsWe also face significant competition from the in-house operations of the businesses we seek as customers, other general and specialized credit reporting and business information services, other information and professional service providers, and credit insurers. For example, in certain International markets, such as Europe, some credit insurers have identified the provision of credit information as an additional revenue stream. In addition, business information solutions and services are becoming more readily available, principally due to the expansion of the Internet, greater availability of public data and the emergence of new providers of business information solutions and services. As discussed in “Our Aspiration and Our Strategy” above, we believe that our Trusted Brand, our Financial Flexibility, our Winning Culture and our DUNSRight Quality Process form a powerful competitive advantage. Our ability to continue to compete effectively will be based on a number of factors, including our ability to:
Intellectual Property We own and control various intellectual property rights, such as trade secrets, confidential information, trademarks, trade names, copyrights, patents and applications therefor. These rights, in the aggregate, are of material importance to our business. We also believe that each of the D&B name and related trade names, marks and logos are of material importance to our business. We are licensed to use certain technology and other intellectual property rights owned and controlled by others, and other companies are licensed to use certain technology and other intellectual property rights owned and controlled by us. We consider our trademarks, service marks, databases, software, patents, patent applications and other intellectual property to be proprietary, and we rely on a combination of statutory (e.g., copyright, trademark, trade secret, patent, etc.) and contract and liability safeguards for protection thereof throughout the world. Unless the context indicates otherwise, the names of our branded solutions and services referred to in this Annual Report on Form 10-K are trademarks, service marks or registered trademarks or service marks owned by or licensed to us or one or more of our subsidiaries. We own patents and patent applications both in the U.S. and in other selected countries of strategic importance to us. The patents and patent applications include claims which pertain to certain technologies which we have determined are proprietary and warrant patent protection. We believe that the protection of our innovative technology, especially technology pertaining to our proprietary DUNSRight Quality Process, through the filing of patent applications is a prudent business strategy and we will continue to seek to protect those assets for which we have expended substantial capital. Filing of these patent applications may or may not provide us with a dominant position in the fields of technology. However, these patent applications may provide us with legal defenses should subsequent patents in these fields be issued to third parties and later asserted against us. Where appropriate, we may also consider asserting or cross-licensing our patents. Employees As of December 31, 2008, we employed approximately 4,900 team members worldwide, of which approximately 3,100 were in our U.S. segment and Corporate and approximately 1,800 were in our International
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Table of Contentssegment. We believe that we have good relations with our employees. There are no unions in our U.S. segment. Workers Councils and Trade Unions represent a portion of our employees in the European and Latin American operations of our International segment. Available Information We are required to file annual, quarterly and current reports, proxy statements and other information with the SEC. Investors may read and copy any document that we file, including this Annual Report on Form 10-K, at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. Investors may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains an Internet site at www.sec.gov that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC, from which investors can electronically access our SEC filings. We make available free of charge on or through our Internet site (www.dnb.com) our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, as soon as reasonably practicable after we electronically file such material with, or furnish the material to, the SEC. The information on our Internet site, on our Hoover’s Internet site or on our related Internet sites is not, and shall not be deemed to be, a part of this Annual Report on Form 10-K or incorporated into any other filings we make with the SEC. Organizational Background of Our Company As used in this report, except where the context indicates otherwise, the terms “D&B,” “Company,” “we,” “us,” or “our” refer to The Dun & Bradstreet Corporation and our subsidiaries. We were incorporated in 2000 in the State of Delaware. For more information on our history, including the various spin-offs leading to our formation and our becoming a public company in September 2000, see Note 13 in Item 8. of this Annual Report on Form 10-K.
Our business model is dependent upon third parties to provide data and certain operational services, the loss of which would materially impact our business and financial results. We rely significantly on third parties to support our business model. For example:
If one or more data providers were to withdraw their data, cease making it available, substantially increase the cost of their data, or not adhere to our data quality standards, our ability to provide solutions and services to our customers could be materially adversely impacted, which could materially impact our business and financial results. Similarly, if one of our outsource providers, including third parties with whom we have strategic relationships, were to experience financial or operational difficulties, their services to us would suffer or they
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Table of Contentsmay no longer be able to provide services to us at all, materially impacting our business and financial results. We cannot be certain that we could replace our large third-party vendors in a timely manner or on terms commercially reasonable to us. In addition, if we were to change a significant outsource provider, an existing provider makes significant changes to the way they conduct their operations, or we seek to in-house certain services performed today by third parties, we may experience unexpected disruptions to the provision of our solutions to our customers, which could have a material impact on our business and financial results. We face competition that may cause price reductions or loss of market share. We are subject to competitive conditions in all aspects of our business. We compete directly with a broad range of companies offering business information services to customers. We also face competition from:
In addition, business information solutions and services are becoming more readily available, principally due to the expansion of the Internet, greater availability of public data and the emergence of new providers of business information solutions and services. Large Internet search engine companies can provide low-cost alternatives to data gathering and change how our customers perform key activities such as marketing campaigns. Such companies, and other third parties which may not be readily apparent today, may become significant low-cost competitors and adversely impact the demand for our solutions and services. Weak economic conditions also can result in customers seeking to utilize free or lower-cost information that is available from alternative sources such as the Internet and European Commission-sponsored projects like the European Business Register. Intense competition could harm us by causing, among other things, price reductions, reduced gross margins and loss of market share. We are facing increased competition outside the U.S., and our competitors could develop an alternative to our D&B Worldwide Network, although we believe we offer superior solutions because of our DUNSRight Quality Process. We are also facing increased competition from consumer credit companies that offer consumer information solutions to help their customers make credit decisions regarding small businesses. In addition, consumer information companies are seeking to expand their operations more broadly into aspects of the business information space. While their presence is currently small in the business information market, given the size of the consumer market in which they play, they have scale advantages in terms of scope of operations and size of relationship with customers, which they can potentially leverage to an advantage. Our ability to continue to compete effectively will be based upon a number of factors, including our ability to:
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A failure in the integrity of our database could harm our brand and result in a loss of sales and an increase in legal claims. The reliability of our solutions is dependent upon the integrity of the data in our global database. We have in the past been subject to customer and third-party complaints and lawsuits regarding our data, which have occasionally been resolved by the payment of money damages. A failure in the integrity of our database could harm us by exposing us to customer or third-party claims or by causing a loss of customer confidence in our solutions. Also, we have licensed, and we may license in the future, proprietary rights to third parties. While we attempt to ensure that the quality of our brand is maintained by the third parties to whom we grant non-exclusive licenses and by customers, they may take actions that could materially and adversely affect the value of our proprietary rights or our reputation. In addition, it cannot be assured that these licensees and customers will take the same steps we have taken to prevent misappropriation of our data solutions or technologies. Our brand and reputation are key assets and competitive advantages of our Company and our business may be affected by how we are perceived in the marketplace. Our brand and its attributes are key assets of the Company. Our ability to attract and retain customers is highly dependent upon the external perceptions of our level of data quality, business practices and overall financial condition. Negative perceptions or publicity regarding these matters could damage our reputation with customers and the public, which could make it difficult for us to attract and maintain customers. Adverse developments with respect to our industry may also, by association, negatively impact our reputation, or result in higher regulatory or legislative scrutiny. Although we monitor developments for areas of potential risk to our reputation and brand, negative perceptions or publicity could materially impact our business and financial results. We rely on annual contract renewals for a substantial part of our revenue and our quarterly results may be significantly impacted by the timing of these renewals or a shift in product mix that results in a change in the timing of revenue recognition. We derive a substantial portion of our revenue from annual customer contracts. If we are unable to renew a significant number of these contracts, our revenue and results of operations would be harmed. In addition, our results of operations from period-to-period may vary due to the timing of customer contract renewals. As contracts are renewed, we have, and may continue to experience, a shift in product mix underlying such contracts. This could result in the deferral of increased amounts of revenue into future periods as a larger portion of revenue is recognized over the term of our contracts rather than upfront at contract signing. Although this may cause our financial results from period-to-period to vary substantially, such change in revenue recognition will not change the total revenue recognized over the life of our contracts.
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Table of ContentsWe may be adversely affected by the current economic environment As a result of the credit market crisis and other macro-economic challenges currently affecting the economy of the United States and other parts of the world, our customers or vendors may experience problems with their earnings, cash flow, or both. This may cause our customers to delay, cancel or significantly decrease their purchases from us and we may experience delays in payment or their inability to pay amounts owed to us. In addition, our vendors may substantially increase their prices without notice. Any such change in the behavior of our customers or vendors may adversely affect our earnings and cash flow. If economic conditions in the United States and other key markets deteriorate further or do not show improvement, we may experience material adverse impacts to our business and operating results. Changes in the legislative, regulatory and commercial environments in which we operate may adversely impact our ability to collect, manage, aggregate and use data and may impact our financial results. Certain types of information we gather, compile and publish are subject to regulation by governmental authorities in certain markets in which we operate, particularly in our international markets. In addition, there is increasing awareness and concern among the general public regarding marketing and privacy matters, particularly as they relate to individual privacy interests and the ubiquity of the Internet. These concerns may result in new laws and regulations. In general, compliance with existing laws and regulations has not to date materially impacted our business and financial results. Nonetheless, future laws and regulations with respect to the collection, management and use of information, and adverse publicity or litigation concerning the commercial use of such information, could materially impact our business and financial results. This could result in legislative or regulatory limitations being imposed on our operations, increased compliance or litigation expense and/or loss of revenue. In addition, governmental agencies may seek, from time-to-time, to increase the fees or taxes that we must pay to acquire, use and/or redistribute data that such governmental agencies collect. While we would seek to pass along any such price increases to our customers or provide alternative services, there is no guarantee that we would be able to do so, given competitive pressures or other considerations. In addition, any such price increases or alternative services may result in reduced usage by our customers and/or loss of market share. We may be unable to achieve our financial aspirations, which could negatively impact our stock price. We have established financial aspirations for the 2008 through 2010 time frame with respect to the financial performance that we believe would be achieved based upon our planned business strategy for the next several years. These financial aspirations can only be achieved if the assumptions underlying our business strategy are fully realized—some of which we cannot control (e.g., market growth rates, macroeconomic conditions and customer preferences). As part of our annual planning process we will review these assumptions and we intend to provide our financial guidance to shareholders on an annual basis. We may be unable to adapt successfully to changes in our customers’ preferences for our solutions, which could adversely impact our revenues. Our success depends in part on our ability to adapt our solutions to our customers’ preferences. Advances in information technology and uncertain or changing economic conditions are changing the way our customers use and purchase business information. As a result, our customers are demanding both lower prices and more features from our solutions, such as decision-making tools like credit scores and electronic delivery formats. If we do not successfully adapt our solutions to our customers’ preferences, our business and financial results would be materially adversely impacted. Specifically, for our larger customers, our continued success will be dependent on our ability to satisfy more of their needs by providing solutions beyond data, such as enhanced analytics and assisting with their data integration efforts. For our smaller customers, our success will depend in part on our ability to develop a strong value proposition, including simplifying our solutions and pricing offerings, to enhance our marketing efforts to these customers and to improve our service to them.
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Table of ContentsTo address customer needs for pricing certainty and increased access to our solutions, we provide subscription pricing plans through our Preferred Pricing Agreement and our Preferred Pricing Agreement with DNBi. These subscription pricing plans provide expanded access to our Risk Management Solutions in a way that provides more certainty over related costs to the customer, which, in turn, generally results in customers increasing their spend on our solutions. These plans have been an important driver of our growth from inception in 2005 to date. Our success moving forward is dependent, in part, on the continued penetration of these offerings and the successful rollout of similar programs in various markets around the world. Similarly, our continued success is dependent on customers’ acceptance of our DNBi offering. Acquisitions, joint ventures or similar strategic relationships may disrupt or otherwise have a negative impact on our business and financial results. As part of our strategy, we may seek to acquire other complementary businesses, products and technologies or enter into joint ventures or similar strategic relationships. These transactions are subject to the following risks:
Our business performance might not be sufficient for us to meet the full year financial guidance that we provide publicly. We provide full-year financial guidance to the public which is based upon our assumptions regarding our expected financial performance. This includes, for example, assumptions regarding our ability to grow revenue, to provide profitable operating income, to achieve desired tax rates and to generate cash. We believe that our financial guidance provides investors and analysts with a better understanding of our view of our near term financial performance. Such financial guidance may not always be accurate, however, due to our inability to meet the assumptions we make and the impact on our financial performance that could occur as a result of the various risks and uncertainties to our business as set forth in these risk factors and in our public filings with the SEC or otherwise. If we fail to meet the full-year financial guidance that we provide or if we find it necessary to revise such guidance as we conduct our operations throughout the year, the market value of our common stock could be materially adversely affected. We have no direct management control over third-party members of the D&B Worldwide Network who conduct business under the D&B brand name in local markets. The D&B Worldwide Network is comprised of wholly-owned subsidiaries, joint ventures that we either control or hold a minority interest in, and third-party members who conduct business under the D&B brand name in local markets. While third-party member participation in the D&B Worldwide Network is controlled by commercial services agreements and the use of our trademarks is controlled by license agreements, we have no direct management control over these members beyond the terms of the agreements. As a result, actions or inactions taken by these third-party members may have a material impact on our business and financial results. For example, one or more third-party members may:
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Such actions or inactions may have an impact on customer confidence in the D&B brand globally, which could materially adversely impact our business and financial results. We may not be able to attract and retain qualified personnel, including members of our sales force, which could impact the quality of our performance and customer satisfaction. Our success and financial results also depend on our continuing ability to attract, retain and motivate highly qualified personnel at all levels, including members of our sales force on whom we rely for the vast majority of our revenue, and to appropriately use the time and resources of such individuals. Competition for these individuals is intense, and we may not be able to retain our key personnel or key members of our sales teams, or attract, assimilate or retain other highly qualified individuals in the future. We have from time-to-time experienced, and we expect to continue to experience, difficulty in hiring and retaining employees, including members of our sales force, with appropriate qualifications. We may lose key business assets or suffer interruptions in product delivery, including loss of data center capacity or the interruption of telecommunications links, the Internet, or power sources which could significantly impede our ability to do business. Our operations depend on our ability, as well as that of third-party service providers to whom we have outsourced several critical functions, to protect data centers and related technology against damage from hardware failure, fire, power loss, telecommunications failure, impacts of terrorism, breaches in security (such as the actions of computer hackers), natural disasters, or other disasters. The on-line services we provide are dependent on links to telecommunications providers. In addition, we generate a significant amount of our revenue through telesales centers and Internet sites that we use in the acquisition of new customers, fulfillment of solutions and services and responding to customer inquiries. We may not have sufficient redundant operations or change management processes in connection with our introduction of new online products or services to prevent a loss or failure in all of these areas in a timely manner. Any damage to our data centers, failure of our telecommunications links or inability to access these telesales centers or Internet sites could cause interruptions in operations that adversely affect our ability to meet customers’ requirements and materially impact our business and financial results. Our operations in the International segment are subject to various risks associated with operations in foreign countries, which could materially impact our business and financial results. Our success depends in part on our various operations outside the United States. For the three years ended December 31, 2008, 2007 and 2006, our International segment accounted for 23%, 22% and 21% of total revenue, respectively. Our International business is subject to many challenges, the most significant being:
Our International strategy includes the leveraging of our D&B Worldwide Network to improve our data quality. We form and manage these strategic alliances to create a competitive advantage for us over the long term; however, these strategic relationships may not be successful or may be subject to ownership change.
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Table of ContentsThe issue of data privacy is an increasingly important area of public policy in various International markets, and we operate in an evolving regulatory environment that could adversely impact aspects of our business or the business of third parties on whom we depend. Our operating results could also be negatively affected by a variety of other factors affecting our foreign operations, many of which are beyond our control. These factors may include currency fluctuations, economic, political or regulatory conditions, competition from government agencies in a specific country or region, trade protection measures and other regulatory requirements. Additional risks inherent in International business activities generally include, among others:
We may be unable to reduce our expense base through our Financial Flexibility, and the related reinvestments from savings from this program may not produce the level of desired revenue growth which would materially impact our business and financial results. Successful execution of our strategy includes reducing our expense base through our Financial Flexibility initiatives, and reallocating our expense base reductions into initiatives to produce our desired revenue growth. The success of this program may be affected by:
If we fail to reduce our expense base, or if we do not achieve our desired level of revenue growth from new initiatives, our business and financial results would be materially impacted. We are involved in tax and legal proceedings that could have a material adverse impact on us. We are involved in tax and legal proceedings, claims and litigations that arise in the ordinary course of business. As discussed in greater detail under “Note 13. Contingencies” in “Notes to Consolidated Financial Statements” in Part II, Item 8. of this Annual Report on Form 10-K, certain of these matters could materially impact our business and financial results.
Not applicable.
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Our corporate office is located at 103 JFK Parkway, Short Hills, New Jersey 07078, in a 123,000-square-foot property that we lease. This property also serves as the executive offices of our U.S. segment. Our other properties are geographically distributed to meet sales and operating requirements worldwide. We generally consider these properties to be both suitable and adequate to meet current operating requirements. As of December 31, 2008, the most important of these other properties include the following sites:
In addition to the above locations, we also conduct operations in other offices across the globe, most of which are leased.
Information in response to this Item is included in Part II, Item 8. “Note 13. Contingencies” and is incorporated by reference into Part I of this Annual Report on Form 10-K.
No matters were submitted to a vote of security holders in the fourth quarter of fiscal year 2008.
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Table of ContentsPART II
Our common stock is listed on the New York Stock Exchange and trades under the symbol DNB. We had 3,085 shareholders of record as of December 31, 2008. The following table summarizes the high and low sales prices for our common stock, as reported in the periods shown:
We paid dividends of $65.6 million and $58.4 million during the years ended December 31, 2008 and 2007, respectively. We did not pay any dividends on our common stock during the year ended December 31, 2006. In January 2009, our Board of Directors approved the declaration of a $0.34 per share dividend for the first quarter of 2009. This cash dividend is payable March 20, 2009, to shareholders of record at the close of business on March 6, 2009. Issuer Purchases of Equity Securities The following table provides information about purchases made by us or on our behalf during the quarter ended December 31, 2008 of shares of equity that are registered pursuant to Section 12 of the Exchange Act:
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Table of ContentsFINANCIAL PERFORMANCE COMPARISON GRAPH* SINCE DECEMBER 31, 2003 In accordance with SEC rules, the graph below compares the Company’s cumulative total shareholder return against the cumulative total return of the Standard & Poor’s 500 Stock Index and a published industry index starting on December 31, 2003. Our past performance may not be indicative of future performance. As an industry index, the Company chose the S&P 500 Commercial & Professional Services Index, a subset of the S&P 500 Stock Index that includes companies that provide business-to-business services. On December 1, 2008, we became listed within the S&P 500 Stock Index. Prior to such date, we were listed within the S&P Midcap 400 Index. Accordingly, and for comparative purposes to our prior year presentation, we have included in the following graph the performances of both the S&P Midcap 400 Index, S&P 400 Midcap Commercial and Professional Services Index, S&P 500 Commercial and Professional Services Index and the S&P 500 Stock Index. COMPARISON OF FIVE YEAR CUMULATIVE TOTAL RETURN AMONG D&B, THE S&P MIDCAP 400 COMMERCIAL & PROFESSIONAL SERVICES INDEX, THE S&P 500 COMMERCIAL & PROFESSIONAL SERVICES INDEX, THE S&P MIDCAP 400 INDEX AND S&P 500 STOCK INDEX
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How We Manage Our Business For internal management purposes, we refer to “core revenue,” which we calculate as total operating revenue less the revenue of divested businesses. Core revenue is used to manage and evaluate the performance of our segments and to allocate resources because this measure provides an indication of the underlying changes in revenue in a single performance measure. Core revenue does not include reported revenue of divested businesses since they are not included in future revenue. On December 27, 2007, we sold our Italian real estate business for $9.0 million, which was a part of our International segment, and we have reclassified the historical financial results of the Italian real estate business as discontinued operations for all periods presented as set forth in this Annual Report on Form 10-K. Accordingly, we have recorded the resulting gain from the sale of $0.4 million (both pre-tax and after-tax) in the first quarter of 2008 in the consolidated statement of operations. As of December 31, 2008, we received approximately $9.0 million in cash. We also isolate the effects of changes in foreign exchange rates on our revenue growth because we believe it is useful for investors to be able to compare revenue from one period to another, both with and without the effects of foreign exchange. As a result, we monitor our core revenue growth both after and before the effects of foreign exchange. Core revenue growth excluding the effects of foreign exchange is referred to as “revenue growth before the effects of foreign exchange.” From time-to-time we have and we may continue to further analyze core revenue growth before the effects of foreign exchange among two components, “organic core revenue growth” and “core revenue growth from acquisitions.” We analyze “organic core revenue growth” and “core revenue growth from acquisitions” because management believes this information provides insight into the underlying health of our business. Core revenue includes the revenue from acquired businesses from the date of acquisition. We evaluate the performance of our business segments based on segment revenue growth before the effects of foreign exchange, and segment operating income growth before certain types of gains and charges that we consider do not reflect our underlying business performance. Specifically, for management reporting purposes, we evaluate business segment performance “before non-core gains and charges” because such charges are not a component of our ongoing income or expenses and/or may have a disproportionate positive or negative impact on the results of our ongoing underlying business operations. A recurring component of non-core gains and charges are our restructuring charges, which result from a foundational element of our growth strategy that we refer to as Financial Flexibility. Through Financial Flexibility, management identifies opportunities to improve the performance of the business in terms of quality, efficiency and cost, in order to generate savings primarily to invest for growth. Such charges are variable from period-to-period based upon actions identified and taken during each period. Management reviews operating results before such charges on a monthly basis and establishes internal budgets and forecasts based upon such measures. Management further establishes annual and long-term compensation such as salaries, target cash bonuses and target equity compensation amounts based on such measures and a significant percentage weight is placed upon such measures in determining whether performance objectives have been achieved. Management believes that by eliminating restructuring charges from such financial measures, and by being overt to shareholders about the results of our operations excluding such charges, business leaders are provided incentives to recommend and execute actions that are in the best long-term interests of our shareholders, rather than being influenced by the potential impact a charge in a particular period could have on their compensation. Additionally, transition costs (period costs such as consulting fees, costs of temporary employees, relocation costs and stay bonuses incurred to implement the Financial Flexibility component of our strategy) are reported as “Corporate and Other” expenses and are not allocated to our segments. See Note 14 to our consolidated financial statements included in Item 8. of this Annual Report on Form 10-K for financial information regarding our segments. Similarly, when we evaluate the performance of our business as a whole, we focus on results (such as operating income, operating income growth, operating margin, net income, tax rate and diluted earnings per share)
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Table of Contentsbefore non-core gains and charges because such non-core gains and charges are not a component of our ongoing income or expenses and/or may have a disproportionate positive or negative impact on the results of our ongoing underlying business operations and may drive behavior that does not ultimately maximize shareholder value. Additionally, for 2008 our non-GAAP (generally accepted accounting principles in the United States of America) measures reflect results on a continuing operations basis. We also use “free cash flow” to manage our business. We define free cash flow as net cash provided by operating activities minus capital expenditures and additions to computer software and other intangibles. Free cash flow measures our available cash flow for potential debt repayment, acquisitions, stock repurchases and additions to cash, cash equivalents and short-term investments. We believe free cash flow to be relevant and useful to our investors as this measure is used by our management in evaluating the funding available after supporting our ongoing business operations and our portfolio of product investments. Free cash flow should not be considered as a substitute measure for, or superior to, net cash flows provided by operating activities, investing activities or financing activities. Therefore, we believe it is important to view free cash flow as a complement to our consolidated statements of cash flows. In addition, we evaluate our U.S. Risk Management Solutions based on two metrics: (1) “subscription,” “non-subscription,” and (2) “DNBi” and “non-DNBi.” We define “subscription” as contracts that allow customers’ unlimited use within predefined ranges, subject to certain conditions. In these instances, we recognize revenue ratably over the term of the contract, which is generally one year and “non-subscription” as all other revenue streams. We define “DNBi” as our interactive, customizable online application that offers our customers real time access to our most complete and up-to-date global DUNSRight information, comprehensive monitoring and portfolio analysis and “non-DNBi” as all other revenue streams. Management believes these measures provide further insight into our performance and growth of our U.S. Risk Management Solutions revenue. The adjustments discussed herein to our results as determined under generally accepted accounting principles in the United States of America (“GAAP”) are among the primary indicators management uses as a basis for our planning and forecasting of future periods, to allocate resources, to evaluate business performance and, as noted above, for compensation purposes. However, these financial measures (results before non-core gains and charges and free cash flow) are not prepared in accordance with GAAP, and should not be considered in isolation or as a substitute for total revenue, operating income, operating income growth, operating margin, net income, tax rate, diluted earnings per share, or net cash provided by operating activities, investing activities and financing activities prepared in accordance with GAAP. In addition, it should be noted that because not all companies calculate these financial measures similarly or at all, the presentation of these financial measures is not likely to be comparable to measures of other companies. See “Results of Operations” below for a discussion of our results reported on a GAAP basis. Overview We have historically managed and reported our operations under the following two segments:
The financial statements of our subsidiaries outside the U.S. and Canada reflect a fiscal year ended November 30 to facilitate the timely reporting of our consolidated financial results and financial position. We continue to manage our business through two segments. However, as of January 1, 2009, Canada has been moved out of our International segment and into our renamed “North America” segment (formerly our U.S. segment). Therefore, on January 1, 2009, we began managing our operations through two segments: North America
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Table of Contents(which consists of the U.S. and Canada) and International (which consists of our operations in Europe, Asia Pacific and Latin America). We will report financial results in this new segment structure beginning with the results for the first quarter of 2009 and conform historical amounts to reflect the new segment structure. Total revenue and core revenue were the same for the years ended December 31, 2008, 2007 and 2006. Therefore, our discussion of our results of operations for the years ended December 31, 2008, 2007 and 2006, references only our core revenue results. The following table presents the contribution by segment of core revenue results.
On January 1, 2008, we began managing our Supply Management business as part of our Risk Management Solutions business. This is consistent with our overall strategy and also reflects customers’ needs to better understand the financial risk of their supply chain. As a result, the contributions of the Supply Management business are now reported as a part of Risk Management Solutions. We have reclassified our historical financial results set forth in Item 8. of this Annual Report on Form 10-K. Prior to January 1, 2008, we reported the results of our Supply Management business as its own solution set. The following table presents the contribution by customer solution set to core revenue.
These customer solution sets are discussed in greater detail in Item 1. “Business” of this Annual Report on Form 10-K. Within our Risk Management Solutions, we monitor the performance of our “Traditional” products, our “Value-Added” products and our “Supply Management” products. Within our Sales & Marketing Solutions, we monitor the performance of our “Traditional” products and our “Value-Added” products. Risk Management Solutions Our Traditional Risk Management Solutions generally consist of reports from our database used primarily for making decisions about new credit applications. Our Traditional Risk Management Solutions constituted the following percentages of total Risk Management Solutions Revenue and Core Revenue:
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Table of ContentsOur Value-Added Risk Management Solutions generally support automated decision-making and portfolio management through the use of scoring and integrated software solutions. Our Value-Added Risk Management Solutions constituted the following percentages of total Risk Management Solutions Revenue and Core Revenue:
Our Supply Management Solutions can help companies maximize revenue growth, contain costs and comply with external regulations. Our Supply Management Solutions constituted the following percentages of total Risk Management Solutions Revenue and Core Revenue:
Sales & Marketing Solutions Our Traditional Sales & Marketing Solutions generally consist of marketing lists, labels and customized data files used by our customers in their direct mail and marketing activities. Our Traditional Sales & Marketing Solutions constituted the following percentages of total Sales & Marketing Solutions Revenue and Core Revenue:
Our Value-Added Sales & Marketing Solutions generally include decision-making and customer information management solutions. Our Value-Added Sales & Marketing Solutions constituted the following percentages of total Sales & Marketing Solutions Revenue and Core Revenue:
Our Critical Accounting Policies and Estimates In preparing our consolidated financial statements and accounting for the underlying transactions and balances reflected therein, we have applied the significant accounting policies described in Note 1 to our consolidated financial statements included in Item 8. of this Annual Report on Form 10-K. Of those policies, we consider the policies described below to be critical because they are both most important to the portrayal of our financial condition and results, and they require management’s subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. We base our estimates on historical experience and on various other factors that we believe to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions. If actual results in a given period ultimately differ from previous estimates, the actual results could have a material impact on such period.
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Table of ContentsWe have discussed the selection and application of our critical accounting policies and estimates with the Audit Committee of our Board of Directors, and the Audit Committee has reviewed the disclosure regarding critical accounting policies and estimates as well as the other sections in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Pension and Postretirement Benefit Obligations Through June 30, 2007, we previously offered to substantially all of our U.S. based employees coverage under a defined benefit plan called The Dun & Bradstreet Corporation Retirement Account (the “U.S. Qualified Plan”). The defined benefit plan covers active and retired employees including retired individuals from spin-off companies (see Note 13 to our consolidated financial statements included in Item 8. of this Annual Report on Form 10-K for further discussion of spin-off companies). The benefits to be paid upon retirement are based on a percentage of the employee’s annual compensation. The percentage of compensation allocated annually to a retirement account ranges from 3% to 12.5% based on age and service. Amounts allocated under the plan also receive interest credits based on the 30-year Treasury rate or equivalent rate published by the Internal Revenue Service. Pension costs are determined actuarially and funded in accordance with the Internal Revenue Code. We also maintain supplemental and excess plans in the United States (the “U.S. Non-Qualified Plans”) to provide additional retirement benefits to certain key employees of the Company. These plans are unfunded, pay-as-you-go plans. The U.S. Qualified Plan and the U.S. Non-Qualified Plans account for approximately 73% and 16% of our pension obligation, respectively, at December 31, 2008. Effective June 30, 2007, we amended the U.S. Qualified Plan and one of the U.S. Non-Qualified Plans, known as the U.S. Pension Benefit Equalization Plan (the “PBEP”). Any pension benefit that had been accrued through such date under the two plans was “frozen” at its then current value and no additional benefits, other than interest on such amounts, will accrue under the U.S. Qualified Plan and the PBEP. Our employees in certain of our international operations are also provided retirement benefits through defined benefit plans, representing the remaining balance of our pension obligations. We also provide various health care and life insurance benefits for retirees. U.S. based employees, who retire with 10 years of vesting service after age 45, are eligible to receive benefits. Postretirement benefit costs and obligations are determined actuarially. In accordance with the Statement of Financial Accounting Standards (“SFAS”) No. 87, “Employers’ Accounting for Pensions,” or “SFAS No. 87,” amended by SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans,” or “SFAS No. 158,” our pension benefit obligations and the related effects on operations are calculated using actuarial assumptions and methodologies. Other postretirement benefits (i.e., health care) are accounted for in accordance with SFAS No. 106, “Employers’ Accounting for Postretirement Benefits Other Than Pensions,” or “SFAS No. 106,” amended by SFAS No. 158, and are also dependent on the application of our assumptions by outside actuaries. The key assumptions used in the measurement of the pension and postretirement obligations and net periodic pension and postretirement costs are:
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Table of ContentsWe believe that the assumptions used are appropriate, though changes in these assumptions would affect our pension and other postretirement benefit costs. The factor with the most immediate impact on our consolidated financial statements is a change in the expected long-term rate of return on pension plan assets for the U.S. Qualified Plan. For 2009, we will continue to use an expected long-term rate of return of 8.25%. This assumption was 8.25% in each of the years for 2008, 2007 and 2006. The 8.25% assumption represents our best estimate of the expected long-term future investment performance of the U.S. Qualified Plan, after considering expectations for future capital market returns and the plan’s asset allocation. As of December 31, 2008, the plan was 63% invested in publicly traded equity securities, 29% invested in debt securities and 8% invested in real estate investments. Due to recent significant declines in equity markets, our actual asset allocation of plan assets at December 31, 2008 differed slightly from the target allocation. Our policy is to bring the actual allocation in-line with the target allocation. Every one-quarter percentage-point increase or decrease in the long-term rate of return increases or reduces our annual operating income by approximately $3 million by increasing or reducing our net periodic pension income. Changes in the discount rate, rate of compensation increase and cash balance accumulation/conversion rates also have an effect on our annual operating income. Based on the factors noted above, the discount rate is adjusted at each remeasurement date while other assumptions are reviewed annually. The discount rate used to determine pension cost for our U.S. pension plans was 6.37%, 5.84% and 5.50% for the years ended December 31, 2008, 2007 and 2006, respectively. For 2009, for all of our U.S. pension plans, we decreased the discount rate to 6.15% from 6.37%. Differences between the assumptions stated above and actual experience could affect our pension and other postretirement benefit costs. When actual plan experience differs from the assumptions used, actuarial gains or losses arise which are accounted for in accordance with SFAS No. 87 and SFAS No. 106, as amended by SFAS No. 158. These gains and losses are aggregated and amortized generally over the average future service periods of employees to the extent that such gains or losses exceed a “corridor” as defined in SFAS No. 87. The purpose of the corridor is to reduce the volatility caused by the difference between actual experience and the pension-related assumptions noted above, on a plan-by-plan basis. For all of our pension plans, total actuarial losses that have not been recognized in our pension costs as of December 31, 2008 and 2007 were $855.2 million and $378.8 million, respectively, of which $682.1 million and $220.1 million, respectively, were attributable to the U.S. Qualified Plan, $89.5 million and $77.4 million, respectively, were attributable to the U.S. Non-Qualified Plans, and the remainder was attributable to the non-U.S. pension plans. See discussion in Note 10 to our consolidated financial statements included in Item 8. of this Annual Report on Form 10-K. We expect to recognize a portion of such losses in our 2009 net periodic pension cost of approximately $18.2 million, $4.8 million and $1.0 million, for the U.S. Qualified Plan, U.S. Non-Qualified Plans and non-U.S. plans, respectively, compared to $9.5 million, $4.6 million and $2.1 million, respectively, in 2008. The higher amortization of actuarial loss in 2009 of $8.7 million and $0.2 million related to the U.S. Qualified Plan and the U.S. Non-Qualified Plans, respectively, which will be included in our pension cost in 2009, is primarily due to significant asset loss during 2008 and lower discount rates applied to the pension plans at December 31, 2008. Differences between the expected long-term rate of return assumption and actual experience could affect our net periodic pension cost. We recorded net pension periodic income for our pension plans of $3.7 million for the year ended December 31, 2008 and net pension cost of $10.7 million and $27.0 million for the years ended December 31, 2007 and 2006, respectively. A major component of the net periodic pension cost is the expected return on plan assets, which was $121.7 million, $117.1 million and $113.5 million for the years ended December 31, 2008, 2007 and 2006, respectively. The expected return on plan assets was determined by multiplying the expected long-term rate of return assumption by the market-related value of plan assets. The market-related value of plan assets recognizes asset gains and losses over five years to reduce the effects of short-term market fluctuations on net periodic cost. We recorded investment losses of $392.2 million for the year ended December 31, 2008 and investment gains of $105.7 million and $175.5 million for the years ended December 31, 2007 and 2006, respectively, in our pension plans, of which a loss of $348.1 million and gains of $91.2 million and $157.1 million, respectively, were attributable to the U.S. Qualified Plan and a loss of $44.1 million and
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Table of Contentsgains of $14.6 million and $18.4 million, respectively, were attributable to the non-U.S. plans. At January 1, 2009, the market-related value of plan assets of our U.S. Qualified Plan and the non-U.S. plans was $1,309.6 million and $149.1 million, respectively, compared with the fair value of its plan assets of $953.3 million and $121.3 million, respectively. Changes in the funded status of our pension plans could result in fluctuation in our shareholders’ equity. We adopted SFAS No. 158 as of December 31, 2006 and we are required to recognize the funded status of our benefit plans as a liability or an asset, on a plan-by-plan basis, with an offsetting adjustment to “Accumulated Other Comprehensive Income,” or “AOCI,” in shareholders’ equity, net of tax. Accordingly, the amounts recognized in equity represent unrecognized gains/losses and prior service costs. Subsequent to the adoption of SFAS No. 158, the previously unrecognized actuarial gains and losses and prior service costs included in shareholders’ equity would be amortized out of equity based on an actuarial calculation each period. Gains and losses and prior service costs that arise during the year will be recognized as a component of comprehensive income which is a component of AOCI. We recorded a net loss of $291.1 million and net income of $79.3 million in AOCI, net of applicable tax, in 2008 and 2007, respectively, related to the actuarial gain/loss and prior service cost arising during the period and the amortization of such items. The increased loss in 2008 was primarily due to the reduction of the funded status for our U.S. Qualified Plan from a surplus of $274.7 million at December 31, 2007 to a deficit of $155.5 million at December 31, 2008, driven by significant asset loss in 2008 and lower discount rate at December 31, 2008. For information on pension and postretirement benefit plan contribution requirements, please see “Future Liquidity—Sources and Uses of Funds—Pension Plan and Postretirement Benefit Plan Contribution Requirements.” See Note 10 to our consolidated financial statements included in Item 8. of this Annual Report on Form 10-K for more information regarding costs of, and assumptions for, our pension and postretirement benefit obligations and costs. Contingencies and Litigation We establish reserves in connection with tax and legal proceedings, claims and litigation when it is probable that a loss has been incurred and the amount of loss is reasonably estimable. Contingent liabilities are often resolved over long periods of time. Estimating probable losses requires analyses of multiple forecasts that often depend on judgments concerning potential actions by third parties and regulators. This is an inherently subjective and complex process, and actual results may differ from our estimates by material amounts. See Note 13 to our consolidated financial statements included in Item 8. of this Annual Report on Form 10-K. Revenue Recognition Revenue is recognized when the following four conditions are met:
If at the outset of an arrangement, we determine that collectibility is not reasonably assured, revenue is deferred until the earlier of when collectibility becomes probable or the receipt of payment. If there is uncertainty as to the customer’s acceptance of our deliverables, revenue is not recognized until the earlier of receipt of customer acceptance or expiration of the acceptance period. If at the outset of an arrangement, we determine that the arrangement fee is not fixed or determinable, revenue is deferred until the arrangement fee becomes estimable, assuming all other revenue recognition criteria have been met.
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Table of ContentsOur Risk Management Solutions are generally sold under fixed price subscription contracts that allow those customers unlimited use within predefined ranges, subject to certain conditions. In these instances, we recognize revenue ratably over the term of the contract, which is generally one year. For arrangements that include an information file delivery with periodic updates to that information file over the contract term, the portion of the revenue related to updates expected to be delivered is deferred as a liability on the balance sheet and recognized as the updates are delivered, usually on a quarterly or monthly basis. We also have monthly or annual contracts that enable a customer to purchase our information solutions during the period of contract at prices per an agreed price list, up to the contracted dollar limit. Revenue on these contracts is recognized as solutions are delivered to the customer, based on the per-solution price. Any additional solutions purchased over this limit may be subject to pricing variations, and revenue is recognized as the solutions are delivered. If customers do not use the full value of their contract and forfeit the unused portion, we recognize the forfeited amount as revenue at contract expiration. Revenue related to services provided over the contract term, such as monitoring services, is recognized ratably over the contract period, which is typically one year. For Sales & Marketing Solutions, we generally recognize revenue upon delivery of the information file to the customer. For arrangements that include periodic updates to that information file over the contract term, the portion of the revenue related to updates expected to be delivered is deferred as a liability on the balance sheet and recognized as the updates are delivered, usually on a quarterly or monthly basis. For subscription solutions that provide continuous access to our marketing information and business reference databases, as well as any access fees or hosting fees related to enabling customers’ access to our information, revenue is recognized ratably over the term of the contract, which is typically one year. Our Internet Solutions consists of Hoover’s, Inc., which also includes Hoover’s First Research division and AllBusiness.com, Inc. Hoover’s and First Research provide subscription solutions that allow continuous access to our business information databases. Revenue is recognized ratably over the term of the contract, which is generally one year. Any additional solutions purchased are recognized upon delivery to the customer. AllBusiness.com provides online media and e-commerce products that provide advertisers the ability to target small business customers. Revenue is recognized as solutions are delivered to the customer over the contract period. For offerings that include software that is considered to be more than incidental, we recognize revenue when a non-cancelable license agreement has been signed and the software has been shipped and installed. Revenue from consulting and training services is recognized as the services are performed. Amounts billed in advance are recorded as a liability on the balance sheet as deferred revenue and are recognized as the services are performed. We have certain solution offerings that are sold as multi-element arrangements. The multiple elements may include information files, file updates for certain solutions, software, services, trademarks and/or other intangibles. For those arrangements that include multi-elements, we first determine whether each deliverable meets the separation criteria to qualify as a separate unit of accounting under Financial Statement Accounting Standards Board Emerging Issues Task Force Issue No. 00-21, “Revenue Arrangements with Multiple Deliverables,” or “EITF 00-21.” If the deliverable or a group of deliverables meets the separation criteria under EITF 00-21, we allocate the total arrangement consideration to each unit of accounting based upon the relative fair value of each unit of accounting. The amount of arrangement consideration that is allocated to a delivered unit of accounting is limited to the amount that is not contingent upon the delivery of another unit of accounting.
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Table of ContentsAfter the arrangement consideration is allocated to each unit of accounting, we apply the appropriate revenue recognition method for each unit of accounting that meets the four conditions described above. All deliverables that do not meet the separation of accounting criteria under EITF 00-21 are combined into one unit of accounting, and the most appropriate revenue recognition method is applied. Recently Issued Accounting Standards See Note 2 to our consolidated financial statements included in Item 8. of this Annual Report on Form 10-K for disclosure of the impact that recently issued accounting standards may have on our audited consolidated financial statements. Results of Operations The following discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements. They should be read in conjunction with the consolidated financial statements and related footnotes set forth in Item 8. of this Annual Report on Form 10-K, which have been prepared in accordance with GAAP. Consolidated Revenue The following table presents our revenue by segment:
The following table presents our revenue by customer solution set:
Year ended December 31, 2008 vs. Year ended December 31, 2007 Core revenue increased $127.1 million, or 8% (7% increase before the effect of foreign exchange), for the year ended December 31, 2008 as compared to the year ended December 31, 2007. The increase was driven by an increase in total U.S. revenue of $72.8 million, or 6%, and an increase in total International revenue of $54.3 million, or 16% (12% increase before the effect of foreign exchange). This $127.1 million increase is primarily attributed to:
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partially offset by:
Customer Solution Set On a customer solution set basis, the $127.1 million increase in core revenue reflects:
Year ended December 31, 2007 vs. Year ended December 31, 2006 Core revenue increased $124.3 million, or 8% (7% increase before the effect of foreign exchange), for the year ended December 31, 2007 as compared to the year ended December 31, 2006. The increase was driven by an increase in total U.S. revenue of $84.1 million, or 7%, and an increase in total International revenue of $40.2 million, or 13% (5% increase before the effect of foreign exchange). This $124.3 million increase is primarily attributed to:
partially offset by:
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Table of ContentsCustomer Solution Set On a customer solution set basis, the $124.3 million increase in core revenue reflects:
Consolidated Operating Costs The following table presents our consolidated operating costs and operating income:
As described above in the section “Management’s Discussion and Analysis of Financial Condition and Results of Operations—How We Manage Our Business,” when we evaluate the performance of our business as a whole, we focus on our operating income (and, therefore, operating costs) before non-core gains and charges, because we do not view these items as reflecting our underlying business operations. We have identified under the caption “Non-Core Gains and (Charges)” below, such non-core gains and charges that are included in our GAAP results. Operating Expenses Year ended December 31, 2008 vs. Year ended December 31, 2007 Operating expenses increased by $50.3 million, or 12%, for the year ended December 31, 2008 as compared to December 31, 2007. The increase was primarily due to the following:
partially offset by:
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Table of ContentsYear ended December 31, 2007 vs. Year ended December 31, 2006 Operating expenses increased by $19.5 million, or 5%, for the year ended December 31, 2007 as compared to December 31, 2006. The increase was primarily due to the following:
partially offset by:
Selling and Administrative Expenses Year ended December 31, 2008 vs. Year ended December 31, 2007 Selling and administrative expenses increased $14.5 million, or 2%, for the year ended December 31, 2008 as compared to December 31, 2007. The increase was primarily due to the following:
partially offset by:
Year ended December 31, 2007 vs. Year ended December 31, 2006 Selling and administrative expenses increased $58.8 million, or 10%, for the year ended December 31, 2007 as compared to December 31, 2006. The increase was primarily due to the following:
partially offset by:
Matters Impacting Both Operating Expenses and Selling and Administrative Expenses Pension, Postretirement and 401(k) Plan We had pension income of $3.7 million for the year ended December 31, 2008 and pension costs of $10.7 million and $27.0 million for the years ended December 31, 2007 and 2006, respectively, for our pension plans globally. The fluctuation in the pension cost was due to the following:
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We expect that the net pension cost in 2009 will be approximately $6.4 million for all of our global pension plans. The increase in pension cost from 2008 to 2009 is primarily driven by higher actuarial loss amortization included in 2009 and a 22 basis points decrease in the discount rate applied to our U.S. plans at January 1, 2008. We had postretirement benefit income of $4.2 million, $3.5 million and $3.5 million for the years ended December 31, 2008, 2007 and 2006, respectively. Higher postretirement benefit income in 2008 compared with 2007 and 2006 was primarily due to higher amortization actuarial gain driven by positive plan experience and changes in assumptions. We expect postretirement benefit income will be approximately $0.6 million in 2009. The decrease in income from 2008 to 2009 was primarily due to the amortization of the prior service credit which is now fully amortized. This prior service was related to the 2003 plan amendment to limit our insurance premium contribution. We had expense associated with our 401(k) Plan of $19.2 million, $12.0 million and $7.0 million for the years ended December 31, 2008, 2007 and 2006, respectively. The increase in expense in 2008 and 2007 was due to the amendment of our matching policy in the 401(k) Plan effective July 1, 2007, to increase our match formula from 50% to 100% of a team member’s contributions and to increase the maximum match to seven percent (7%) from six percent (6%), of such team member’s eligible compensation, subject to certain 401(k) Plan limitations. See Note 18 to our consolidated financial statements included in Item 8. of this Annual Report on Form 10-K for changes to our 401(k) Plan. We consider net pension income/cost and postretirement benefit income to be part of our compensation costs, and, therefore, they are included in operating expenses and in selling and administrative expenses, based upon the classifications of the underlying compensation costs. See the discussion of “Our Critical Accounting Policies and Estimates—Pension and Postretirement Benefit Obligations,” above, and Note 10 to our consolidated financial statements included in Item 8. of this Annual Report on Form 10-K. Stock-Based Compensation On January 1, 2006, we adopted SFAS No. 123 (revised 2004) “Share-Based Payments,” or “SFAS No. 123R,” which requires us to recognize stock-based compensation for our stock option programs and Employee Stock Purchase Plan or “ESPP.” For the years ended December 31, 2008, 2007 and 2006, we recognized total stock-based compensation expense of $27.6 million, $25.9 million and $20.8 million, respectively. For the years ended December 31, 2008, 2007 and 2006, we recognized expense associated with our stock option programs of $11.0 million, $11.9 million and $12.7 million, respectively. The decrease for the year ended December 31, 2008 was primarily due to fewer stock options outstanding when compared to the same period in
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Table of Contents2007. The decrease for the year ended December 31, 2007 was primarily due to fewer unvested stock options outstanding expensed in 2007 partially offset by fewer forfeitures associated with fewer terminated employees in 2007 as compared to the same period in 2006. For the years ended December 31, 2008, 2007 and 2006, we recognized expense associated with restricted stock, restricted stock unit and restricted stock opportunity awards of $15.6 million, $13.1 million and $7.1 million (net of $0.5 million related to the accumulated effect of forfeiture assumptions), respectively. The increase for the year ended December 31, 2008 was primarily due to the addition of the 2008 annual grant and special grants in the fourth quarter of 2007. The increase for the year ended December 31, 2007 was primarily due to the addition of the 2007 annual grant, fewer forfeitures associated with fewer terminated employees in 2007 as compared to the same period in 2006 and a cumulative accounting adjustment included in the three months ended March 31, 2006 expense to reflect adjustments to previously recognized compensation expense for awards outstanding at the adoption date of SFAS No. 123R that we do not expect to vest. We consider these costs to be part of our compensation costs and, therefore, they are included in operating expenses and in selling and administrative expenses, based upon the classifications of the underlying compensation costs. Depreciation and Amortization Year ended December 31, 2008 vs. Year ended December 31, 2007 Depreciation and amortization increased $11.9 million, or 26%, for the year ended December 31, 2008 as compared to December 31, 2007. This increase was primarily driven by the increased capital costs for revenue generating investments to enhance our strategic capabilities (such as DNBi) and the amortization of acquired intangible assets resulting from our acquisitions and our majority-owned joint ventures. Year ended December 31, 2007 vs. Year ended December 31, 2006 Depreciation and amortization increased $14.5 million, or 45%, for the year ended December 31, 2007 as compared to December 31, 2006. This increase was primarily driven by the increased capital costs in investments to enhance our strategic capabilities and amortization of acquired intangible assets resulting from our acquisitions and our majority-owned joint ventures. Restructuring Charge Restructuring charges have been recorded in accordance with SFAS No. 146, “Accounting for the Costs Associated with Exit or Disposal Activities,” or “SFAS No. 146,” or SFAS No. 112, “Employers’ Accounting for Postemployment Benefits,” or “SFAS No. 112,” as appropriate. The curtailment gains were recorded in accordance with SFAS No. 106 and the curtailment charges were recorded in accordance with SFAS No. 87 and SFAS No. 88, “Employers’ Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits.” We account for one-time termination benefits, contract terminations, asset write-offs, and/or costs to terminate lease obligations less assumed sublease income in accordance with SFAS No. 146, which addresses financial accounting and reporting for costs associated with restructuring activities. Under SFAS No. 146, we establish an estimated liability for a cost associated with an exit or disposal activity, including severance and lease termination obligations, and other related costs, when the liability is incurred, rather than at the date that we commit to an exit plan. We reassess the expected cost to complete the exit or disposal activities at the end of each reporting period and adjust our remaining estimated liabilities, if necessary. We record severance-related expenses once they are both probable and estimable in accordance with the provisions of SFAS No. 112 for severance costs provided under an ongoing benefit arrangement.
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Table of ContentsThe determination of when we accrue for severance costs and which standard applies depends on whether the termination benefits are provided under a one-time benefit arrangement as defined by SFAS No. 146 or under an ongoing arrangement as described in SFAS No. 112. Inherent in the estimation of the costs related to the restructurings are assessments related to the most likely expected outcome of the significant actions to accomplish the exit activities. In determining the charges related to the restructurings, we had to make estimates related to the expenses associated with the restructurings. These estimates may vary from actual costs depending, in part, upon factors that may be beyond our control. We will continue to review the status of our restructuring obligations on a quarterly basis and, if appropriate, record changes to these obligations in current operations based on management’s most current estimates. During the year ended December 31, 2008, we recorded a $31.4 million restructuring charge in connection with Financial Flexibility initiatives. The significant components of these charges included:
During the year ended December 31, 2007, we recorded a $25.1 million restructuring charge in connection with Financial Flexibility initiatives. The significant components of these charges included:
During the year ended December 31, 2006, we recorded a $25.5 million restructuring charge in connection with Financial Flexibility initiatives. The significant components of these charges and gains included:
Interest Income (Expense)—Net The following table presents our “Interest Income (Expense)—Net”:
Interest income increased $4.2 million, or 57%, for the year ended December 31, 2008 as compared to December 31, 2007, primarily due to higher interest-bearing investments partially offset by lower interest rates. Interest income remained flat at $7.3 million for the years ended December 31, 2007 and 2006, primarily due to fewer interest-bearing investments during the year ended December 31, 2007 offset by higher interest rates during the year ended December 31, 2007.
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Table of ContentsInterest expense increased by $19.1 million, or 68%, for the year ended December 31, 2008 as compared to December 31, 2007, primarily attributable to higher amounts of debt outstanding, partially offset by lower interest rates. Interest expense increased by $8.0 million, or 39%, for the year ended December 31, 2007 as compared to December 31, 2006, primarily attributable to higher outstanding borrowings on our credit facility during the year ended December 31, 2007, partially offset by lower interest rates associated with our $300 million fixed-rate notes that we issued in March 2006 compared to higher interest rates associated with our $300 million fixed-rate notes that matured in March 2006 (see Note 6 to our consolidated financial statements included in Item 8. of this Annual Report on Form 10-K). Other Income (Expense)—Net The following table presents the components of “Other Income (Expense)—Net”:
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Table of ContentsProvision for Income Taxes
Minority Interest Income (Expense) For the year ended December 31, 2008, we recorded minority interest expense of $2.4 million. Minority interest expense primarily represents the minority owner’s share of the net income in our Huaxia/D&B China Joint Venture and Tokyo Shoko Research/D&B Japan Joint Venture for the year ended December 31, 2008. For the year ended December 31, 2007, we recorded minority interest income of $0.9 million. There was no minority interest income/expense for the year ended December 31, 2006. Discontinued Operations On December 27, 2007, we sold our Italian real estate business for $9.0 million, which was a part of our International segment, and we have reclassified the historical financial results of the Italian real estate business as discontinued operations for all periods presented as set forth in this Annual Report on Form 10-K. Accordingly, we have recorded the resulting gain from the sale of $0.4 million (both pre-tax and after-tax) in the first quarter of 2008 in the consolidated statement of operations. As of December 31, 2008, we received approximately $9.0 million in cash. Earnings Per Share We reported the following earnings per share (“EPS”):
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Table of ContentsFor the year ended December 31, 2008, basic EPS increased 12% compared with the year ended December 31, 2007, primarily due to a 4% increase in net income due to increased operating performance, the favorable resolution of global tax audits including the liquidation of dormant International corporations and/or divested entities, settlement of a legacy tax matter arbitration, the release of reserves in 2008 for uncertain tax positions due to the expiration of a statute of limitations and a 7% reduction in the weighted average number of basic shares outstanding resulting from our total share repurchases. For the year ended December 31, 2008, diluted EPS increased 12% compared with the year ended December 31, 2007, primarily due to a 4% increase in net income due to increased operating performance, the favorable resolution of global tax audits including the liquidation of dormant International corporations and/or divested entities, settlement of a legacy tax matter arbitration, the release of reserves in 2008 for uncertain tax positions due to the expiration of a statute of limitations and a 7% reduction in the weighted average number of diluted shares outstanding resulting from our total share repurchases. For the year ended December 31, 2008, we repurchased 3.5 million shares of common stock for $299.5 million under our Board of Directors approved share repurchase programs. In addition, we repurchased 0.9 million shares of common stock for $82.4 million under our Board of Directors approved share repurchase program to mitigate the dilutive effect of shares issued under our stock incentive plans and ESPP. For the year ended December 31, 2007, basic EPS increased 34% compared with the year ended December 31, 2006, due to a 24% increase in net income due to increased operating performance, a tax reserve true-up for the settlement of 1997-2002 tax years, primarily related to the “Amortization of Royalty Expense/Deductions/Royalty Income 1997-2002” transaction, gain associated with Huaxia/D&B China Joint Venture, gain associated with Tokyo Shoko Research/D&B Japan Joint Venture and an 8% reduction in the weighted average number of basic shares outstanding as a result of our share repurchase programs. For the year ended December 31, 2007, diluted EPS increased 35% compared with the year ended December 31, 2006, due to a 24% increase in net income due to increased operating performance, a tax reserve true-up for the settlement of 1997-2002 tax years, primarily related to the “Amortization of Royalty Expense/Deductions/Royalty Income 1997-2002” transaction, gain associated with Huaxia/D&B China Joint Venture, gain associated with Tokyo Shoko Research/D&B Japan Joint Venture and an 8% reduction in the weighted average number of diluted shares outstanding as a result of our share repurchase programs. For the year ended December 31, 2007, we repurchased 3.3 million shares of common stock for $298.2 million under our Board of Directors approved share repurchase programs. In addition, basic and diluted EPS were impacted by our repurchases of 1.2 million shares of common stock for $110.3 million under our Board of Directors approved share repurchase programs to mitigate the dilutive effect of shares issued under our stock incentive plans and ESPP.
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Table of ContentsNon-Core Gains and (Charges) For internal management purposes, we treat certain gains and charges that are included in “Consolidated Operating Costs,” “Other Income (Expense)—Net” and “Provision for Income Taxes” as non-core gains and charges. These non-core gains and charges are summarized in the table below. We exclude non-core gains and charges when evaluating our financial performance because we do not consider these items to reflect our underlying business performance.
Segment Results The operating segments reported below are our segments for which separate financial information is available and upon which operating results are evaluated by management on a timely basis to assess performance and to allocate resources. Our results are reported under the following two segments: U.S. and International.
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Table of ContentsU.S. The U.S. is our largest segment representing 77%, 78% and 79% of our core revenue for the years ended December 31, 2008, 2007 and 2006, respectively. The following table presents our U.S. core revenue by customer solution set and U.S. operating income for the years ended December 31, 2008, 2007 and 2006.
Year ended December 31, 2008 vs. Year ended December 31, 2007 U.S. Overview U.S. core revenue increased $72.8 million, or 6%, for the year ended December 31, 2008 as compared to the year ended December 31, 2007. The increase reflects growth in all of our customer solution sets. U.S. Customer Solution Sets On a customer solution set basis, the $72.8 million increase in core revenue for the year ended December 31, 2008 as compared to the year ended December 31, 2007, reflects: Risk Management Solutions
For the year ended December 31, 2008, Traditional Risk Management Solutions, which accounted for 72% of total U.S. Risk Management Solutions, increased 4%. The primary drivers of this growth were:
partially offset by:
For the year ended December 31, 2008, Value-Added Risk Management Solutions, which accounted for 21% of total U.S. Risk Management Solutions, increased 3%. The primary drivers of this growth were:
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Table of Contentspartially offset by:
For the year ended December 31, 2008, Supply Management Solutions, which accounted for 7% of total U.S. Risk Management Solutions, increased 11%, on a small base. We believe that we will continue to experience a greater percentage of sales on new solutions where revenue will be recognized in subsequent quarters. As a result, we believe that quarterly revenue will continue to be positively impacted by the recognition of deferred revenue from prior quarter sales, offset by the deferral of revenue from current sales into subsequent periods. Sales & Marketing Solutions
For the year ended December 31, 2008, Traditional Sales & Marketing Solutions, which accounted for 38% of total U.S. Sales & Marketing Solutions, increased 5%. The increase was primarily due to:
partially offset by:
For the year ended December 31, 2008, Value-Added Sales & Marketing Solutions, which accounted for 62% of total U.S. Sales & Marketing Solutions, increased 6%. The increase was primarily due to:
partially offset by:
Internet Solutions
U.S. Operating Income U.S. operating income for the year ended December 31, 2008 was $496.5 million, compared to $466.0 million for the year ended December 31, 2007, an increase of $30.5 million, or 7%. The increase in operating income was primarily attributed to:
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Year ended December 31, 2007 vs. Year ended December 31, 2006 U.S. Overview U.S. core revenue increased $84.1 million, or 7%, for the year ended December 31, 2007 as compared to the year ended December 31, 2006. The increase reflects growth in all of our customer solution sets. U.S. Customer Solution Sets On a customer solution set basis, the $84.1 million increase in core revenue for the year ended December 31, 2007 as compared to the year ended December 31, 2006, reflects: Risk Management Solutions
For the year ended December 31, 2007, Traditional Risk Management Solutions, which accounted for 73% of total U.S. Risk Management Solutions, increased 5%. The primary drivers of this growth were:
partially offset by:
For the year ended December 31, 2007, Value-Added Risk Management Solutions, which accounted for 21% of total U.S. Risk Management Solutions, increased 1%. The primary drivers of this growth were:
partially offset by:
For the year ended December 31, 2007, Supply Management Solutions, which accounted for 6% of total U.S. Risk Management Solutions, increased 15%, on a small base.
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Table of ContentsWe believe that we will continue to experience a greater percentage of sales on new solutions where revenue will be recognized in subsequent quarters. As a result, we believe that quarterly revenue will continue to be positively impacted by the recognition of deferred revenue from prior quarter sales, offset by the deferral of revenue from current sales into subsequent periods. Sales & Marketing Solutions
For the year ended December 31, 2007, Traditional Sales & Marketing Solutions, which accounted for 39% of total U.S. Sales & Marketing Solutions, increased 3%. The increase was primarily driven by higher commitments from our existing customers, new customer acquisitions and revenue associated with our acquisition of the Education Division of Automation Research, Inc. d/b/a MKTG Services. For the year ended December 31, 2007, Value-Added Sales & Marketing Solutions, which accounted for 61% of total U.S. Sales & Marketing Solutions, increased 14%. The increase was primarily driven by higher purchases from our existing customers resulting from our global business marketing information database powered by Acxiom’s grid computing platform. Internet Solutions
U.S. Operating Income U.S. operating income for the year ended December 31, 2007 was $466.0 million, compared to $425.8 million for the year ended December 31, 2006, an increase of $40.2 million, or 10%. The increase in operating income was primarily attributed to:
partially offset by:
International International represented 23%, 22% and 21% of our core revenue for the years ended December 31, 2008, 2007 and 2006, respectively. The following table presents our International revenue by customer solution set and International operating income.
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Table of ContentsYear ended December 31, 2008 vs. Year ended December 31, 2007 International Overview International core revenue increased $54.3 million, or 16% (12% increase before the effect of foreign exchange), for the year ended December 31, 2008 as compared to the year ended December 31, 2007.
International Customer Solution Sets On a customer solution set basis, the $54.3 million increase in International core revenue for the year ended December 31, 2008, as compared to the year ended December 31, 2007, reflects: Risk Management Solutions
For the year ended December 31, 2008, Traditional Risk Management Solutions, which accounted for 82% of International Risk Management Solutions, increased 19% (15% increase before the effect of foreign exchange). The increase in Traditional Risk Management Solutions is primarily due to:
For the year ended December 31, 2008, Value-Added Risk Management Solutions, which accounted for 17% of International Risk Management Solutions, increased 8% (both before and after the effect of foreign exchange), primarily due to:
partially offset by:
For the year ended December 31, 2008, Supply Management Solutions, which accounted for 1% of International Risk Management Solutions, decreased 17% (20% decrease before the effect of foreign exchange) on a small base.
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Table of ContentsSales & Marketing Solutions
For the year ended December 31, 2008, Traditional Sales & Marketing Solutions, which accounted for 46% of International Sales & Marketing Solutions, decreased 8% (6% decrease before the effect of foreign exchange). This was primarily attributed to lower revenue in certain of our International markets, resulting from an increasingly competitive marketplace and economic pressures. For the year ended December 31, 2008, Value-Added Sales & Marketing Solutions, which accounted for 54% of International Sales & Marketing Solutions, increased 43% (37% increase before the effect of foreign exchange). The increase was primarily due to:
Internet Solutions
Operating Income International operating income for the year ended December 31, 2008 was $87.7 million, compared to $69.0 million for the year ended December 31, 2007, an increase of $18.7 million, or 27%, primarily due to:
partially offset by:
Year ended December 31, 2007 vs. Year ended December 31, 2006 International Overview International core revenue increased $40.2 million, or 13% (5% increase before the effect of foreign exchange), for the year ended December 31, 2007 as compared to the year ended December 31, 2006. The increase is primarily due to:
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partially offset by:
International Customer Solution Sets On a customer solution set basis, the $40.2 million increase in International core revenue for the year ended December 31, 2007, as compared to the year ended December 31, 2006, reflects: Risk Management Solutions
For the year ended December 31, 2007, Traditional Risk Management Solutions, which accounted for 80% of International Risk Management Solutions, increased 5% (3% decrease before the effect of foreign exchange). The increase in Traditional Risk Management Solutions is primarily due to the positive impact of foreign exchange. Overall, Traditional Risk Management Solutions experienced:
partially offset by:
For the year ended December 31, 2007, Value-Added Risk Management Solutions, which accounted for 18% of International Risk Management Solutions, increased 44% (34% increase before the effect of foreign exchange) driven mainly by higher-value project-oriented business in our UK and Benelux markets, plus increased royalty payments from our D&B Worldwide Network. For the year ended December 31, 2007, Supply Management Solutions, which accounted for 2% of International Risk Management Solutions, increased 2% (7% decrease before the effect of foreign exchange) on a small base. Sales & Marketing Solutions
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Table of ContentsFor the year ended December 31, 2007, Traditional Sales & Marketing Solutions, which accounted for 57% of International Sales & Marketing Solutions, increased 23% (14% increase before the effect of foreign exchange). The increase is primarily attributed to:
For the year ended December 31, 2007, Value-Added Sales & Marketing Solutions, which accounted for 43% of International Sales & Marketing Solutions, increased 25% (19% increase before the effect of foreign exchange). The increase is primarily attributed to:
Internet Solutions
Operating Income International operating income for the year ended December 31, 2007 was $69.0 million, compared to $74.6 million for the year ended December 31, 2006, a decrease of $5.6 million, or 8%, primarily due to:
partially offset by:
Market Risk We are exposed to the impact of interest rate changes, foreign currency fluctuations and changes in the market value of certain of our investments. We employ established policies and procedures to manage our exposure to changes in interest rates and foreign currencies. We use short-term foreign exchange forward contracts to hedge short-term foreign currency denominated loans, investments and certain third-party and intercompany transactions and, from time-to-time, we have used foreign exchange option contracts to reduce our International earnings exposure to adverse changes in foreign currency exchange rates. In addition, from time-to-time, we use interest rate instruments to hedge a portion of the interest rate exposure on our outstanding fixed-rate notes, as discussed under “Interest Rate Risk” below.
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Table of ContentsA discussion of our accounting policies for financial instruments is included in the summary of significant accounting policies in Note 1 to our consolidated financial statements included in Item 8. of this Annual Report on Form 10-K, and further disclosure relating to financial instruments is included in Note 7 to our consolidated financial statements included in Item 8. of this Annual Report on Form 10-K. Interest Rate Risk Management In December 2008, we entered into interest rate swap agreements with aggregate notional amounts of $75 million, and designated these swaps as cash flow hedges against variability in cash flows related to our bank revolving credit facility. These transactions were accounted for as cash flow hedges and, as such, changes in fair value of the hedges are recorded in accumulated other comprehensive income or “AOCI.” Approximately $0.6 million of net derivative losses associated with these swaps was included in AOCI at December 31, 2008. In January 2008, we entered into interest rate derivative transactions with aggregate notional amounts of $400 million. The objective of these hedges was to mitigate the variability of future cash flows from market changes in Treasury rates in the anticipation of the below referenced debt issuance. These transactions were accounted for as cash flow hedges and, as such, changes in fair value of the hedges that took place through the date of debt issuance were recorded in AOCI. In connection with the issuance of the senior notes with a face value of $400 million that mature on April 1, 2013 notes, bearing interest at an annual rate of 6.00%, payable semi-annually (the “2013 notes”), these interest rate derivative transactions were executed, resulting in a payment of $8.5 million at the date of termination. The payments are recorded in AOCI, and will be amortized over the life of the 2013 notes. In April 2008, we issued the 2013 notes. In September 2005 and February 2006, we entered into interest rate derivative transactions with aggregate notional amounts of $200 million and $100 million, respectively. The objective of these hedges was to mitigate the variability of future cash flows from market changes in Treasury rates in the anticipation of the below referenced debt issuance. These transactions were accounted for as cash flow hedges, and as such, changes in fair value of the hedges that took place through the date of debt issuance were recorded in AOCI. In connection with the issuance of senior notes (the “2011 notes”), these interest rate derivative transactions were executed, resulting in proceeds of approximately $5.0 million at the date of termination. The proceeds are recorded in AOCI and will be amortized over the life of the 2011 notes. At December 31, 2006, we had a $300 million bank revolving credit facility available at prevailing short-term interest rates, which we terminated on April 19, 2007, and then entered into a new $500 million, five-year bank revolving credit facility, which expires in April 2012. On January 25, 2008, we exercised a $150 million expansion feature on our $500 million credit facility expanding the total facility to $650 million. Borrowings under the $650 million credit facility are available at prevailing short-term interest rates. At December 31, 2008 and December 31, 2007, we had $203.4 million and $425.3 million of floating-rate debt outstanding under the facility, respectively. A 100 basis point increase/decrease in the weighted average interest rate on our outstanding variable rate debt at December 31, 2008, would result in an incremental increase/decrease in annual interest expense of approximately $1 million. Foreign Exchange Risk Management We have numerous offices in countries outside the U.S. and conduct operations in various countries through minority equity investments and strategic relationships with local providers. Our International operations generated approximately 23% and 22% of our core revenue for the years ended December 31, 2008 and 2007, respectively. Approximately 37% and 35% of our assets as of December 31, 2008 and 2007, respectively, were located outside the U.S.
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Table of ContentsOur objective in managing exposure to foreign currency fluctuations is to reduce the volatility caused by foreign exchange rate changes on the earnings, cash flows and financial position of our International operations. We follow a policy of hedging balance sheet positions denominated in currencies other than the functional currency applicable to each of our various subsidiaries. In addition, we are subject to foreign exchange risk associated with our International earnings and investments. We use short-term, foreign exchange forward and option contracts to implement our hedging strategies. Typically, these contracts have maturities of twelve months or less. These contracts are denominated primarily in the British pound sterling, the Euro and Canadian dollar. The gains and losses on the forward contracts associated with the balance sheet positions hedge are recorded in “Other Income (Expense)—Net” in our consolidated financial statements and are essentially offset by the gains and losses on the underlying foreign currency transactions. As in prior years, we have hedged substantially all balance sheet positions denominated in a currency other than the functional currency applicable to each of our various subsidiaries with short-term forward foreign exchange contracts. In addition, from time-to-time, we use foreign exchange option contracts to hedge certain foreign earnings and foreign exchange forward contracts to hedge certain net investment positions. The underlying transactions and the corresponding forward exchange and option contracts are mark-to-market at the end of each quarter and are reflected within our consolidated financial statements. At December 31, 2008, we did not have any option contracts outstanding. At December 31, 2007, there were $54.1 million in option contracts outstanding. At December 31, 2008 and 2007, we had a notional amount of approximately $254.5 million and $185.4 million, respectively, of foreign exchange forward contracts outstanding that offset foreign currency denominated loans. Realized gains and losses associated with these contracts were $16.2 million and $41.8 million, respectively, at December 31, 2008; $0.4 million and $0.4 million, respectively, at December 31, 2007; and $0.4 million and $0.9 million, respectively, at December 31, 2006. Unrealized gains and losses associated with these contracts were $0.4 million and $2.8 million, respectively, at December 31, 2008; $0.4 million and $0.1 million, respectively, at December 31, 2007; and $0.4 million and $0.7 million, respectively, at December 31, 2006. If exchange rates were to increase on average 10% from year-end levels, without the benefit of having hedging activities, the unrealized loss would be approximately $13 million. If exchange rates on average were to decrease 10% from year-end levels, without the benefit of having hedging activities, the unrealized gain would be approximately $10 million. However, the estimated potential gain and loss on these contracts is expected to be substantially offset by changes in the dollar value of the underlying transactions. Liquidity and Financial Position In connection with our focus on delivering Total Shareholder Return or “TSR,” we will remain disciplined in the use of our shareholders’ cash, maintaining three key priorities for the use of this cash:
We believe that cash provided by operating activities, supplemented as needed with available financing arrangements, is sufficient to meet our short-term needs (twelve months or less), including the cash cost of restructuring charges, transition costs, contractual obligations and contingencies (see Note 13 to our consolidated financial statements included in Item 8. of this Annual Report on Form 10-K), excluding the legal matters identified in said note for which exposures cannot be estimated or are not probable. In addition, we believe that
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Table of Contentsour ability to readily access the bank and capital markets for incremental financing needs will enable us to meet our continued focus on TSR. We have the ability to access the short-term borrowings market from time-to-time to fund working capital needs, acquisitions and share repurchases. Such borrowings would be supported by our credit facility, when needed. The recent and unprecedented disruption in the current economic environment has had a significant adverse impact on a number of commercial and financial institutions. At this point in time, our liquidity has not been impacted by the current credit environment and management does not expect that it will be materially impacted in the near-future. Management will continue to closely monitor our liquidity, the credit markets and our financial counterparties. However, management cannot predict with any certainty the impact to us of any further disruption in the credit environment. The following discussions are on a continuing operations basis and therefore exclude the results of the Italian real estate business. See Note 17 to our consolidated financial statements included in Item 8. of this Annual Report on Form 10-K. Cash Provided by Operating Activities from Continuing Operations Net cash provided by operating activities was $433.9 million, $384.6 million and $290.8 million for the years ended December 31, 2008, 2007 and 2006, respectively. Year ended December 31, 2008 vs. Year ended December 31, 2007 Net cash provided by operating activities increased by $49.3 million for the year ended December 31, 2008 compared to the year ended December 31, 2007. This increase was primarily driven by:
partially offset by:
Year ended December 31, 2007 vs. Year ended December 31, 2006 Net cash provided by operating activities increased by $93.8 million for the year ended December 31, 2007 compared to the year ended December 31, 2006. This increase was primarily driven by:
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Cash (Used in) Provided by Investing Activities from Continuing Operations Net cash used in investing activities was $154.5 million and $216.4 million for the years ended December 31, 2008 and 2007, respectively. Net cash provided by investing activities was $48.1 million for the year ended December 31, 2006. Year ended December 31, 2008 vs. Year ended December 31, 2007 Net cash used in investing activities was $154.5 million for the year ended December 31, 2008, as compared to cash used in investing activities of $216.4 million for the year ended December 31, 2007. The $61.9 million decrease primarily reflects the following activities:
partially offset by:
Year ended December 31, 2007 vs. Year ended December 31, 2006 Net cash used in investing activities was $216.4 million for the year ended December 31, 2007, as compared to cash provided by investing activities of $48.1 million for the year ended December 31, 2006. The $264.5 million decrease primarily reflects the following activities:
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Cash Used in Financing Activities from Continuing Operations Net cash used in financing activities was $242.5 million, $143.0 million and $431.5 million for the years ended December 31, 2008, 2007 and 2006, respectively. As set forth below for all these years, these changes primarily relate to contractual obligations, payments of dividends, stock-based proceeds from stock option exercises, share repurchases and spin-off obligations. Contractual Obligations Debt In March 2006, we issued senior notes with a face value of $300 million that mature on March 15, 2011, bearing interest at a fixed annual rate of 5.50%, payable semi-annually (the “2011 notes”). The proceeds were used to repay our then existing $300 million senior notes bearing interest at a fixed annual rate of 6.625%, payable semi-annually, which matured in March 2006. On September 30, 2005 and February 10, 2006, we entered into interest rate derivative transactions with aggregate notional amounts of $200 million and $100 million, respectively. The objective of these hedges was to mitigate the variability of future cash flows from market changes in Treasury rates in the anticipation of the issuance of the 2011 notes. These transactions were accounted for as cash flow hedges and, as such, changes in fair value of the hedges that took place through the date of the issuance of the 2011 notes were recorded in AOCI. In connection with the issuance of the 2011 notes, these interest rate derivative transactions were executed, resulting in proceeds of approximately $5.0 million at the date of termination. The proceeds are recorded in AOCI and are being amortized over the life of the 2011 notes. In April 2008, we issued 2013 notes with a face value of $400 million that mature on April 1, 2013, bearing interest at a fixed annual rate of 6.00%, payable semi-annually. The proceeds from this issuance were used to repay indebtedness under our credit facility. On January 30, 2008, we entered into interest rate derivative transactions with aggregate notional amounts of $400 million. The objective of these hedges was to mitigate the variability of future cash flows from market changes in Treasury rates in anticipation of the issuance of the 2013 notes. These transactions were accounted for as cash flow hedges and, as such, changes in fair value of the hedges that took place through the date of the issuance of the 2013 notes were recorded in AOCI. In connection with the issuance of the 2013 notes, these interest rate derivative transactions were executed, resulting in a payment of $8.5 million at the date of termination. The payments are recorded in AOCI, and are being amortized over the life of the 2013 notes. Credit Facility At December 31, 2006, we had a $300 million bank revolving credit facility, which we terminated on April 19, 2007, and entered into a $500 million, five-year bank revolving credit facility. At December 31, 2007, we had a $500 million, five-year bank revolving credit facility, which expires in April 2012. Borrowings under the $500 million credit facility are available at prevailing short-term interest rates. On January 25, 2008, we exercised a $150 million expansion feature on our $500 million credit facility expanding the total facility to $650 million. At December 31, 2008, we had $203.4 million of borrowings
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Table of Contentsoutstanding under the $650 million credit facility. At December 31, 2007, we had $425.3 million of borrowings outstanding under the $500 million credit facility. We borrowed under these facilities from time-to-time during the year ended December 31, 2008 to fund our share repurchases, acquisition strategy and working capital needs. Dividends The total amount of dividends paid during the years ended December 31, 2008 and 2007 was $65.6 million and $58.4 million, respectively. We did not pay any dividends on our common stock during the year ended December 31, 2006. Stock-based Programs For the year ended December 31, 2008, net proceeds from stock-based awards were $23.8 million compared to $31.3 million for the year ended December 31, 2007. The decrease was primarily attributed to a decrease in the volume of stock option exercises in 2008 as compared to the prior period. For the year ended December 31, 2007, net proceeds from stock-based awards were $31.3 million compared to $50.5 million for the year ended December 31, 2006. The decrease was primarily attributed to a decrease in the volume of stock option exercises in 2007 as compared to the prior period. Share Repurchases During the year ended December 31, 2008, we repurchased 4.4 million shares of common stock for $381.9 million under our share repurchase programs. The share repurchases are comprised of the following programs:
During the year ended December 31, 2007, we repurchased 4.5 million shares of common stock for $408.5 million under our share repurchase programs. The share repurchases are comprised of the following programs:
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Table of ContentsDuring the year ended December 31, 2006, we repurchased 8.9 million shares of common stock for $662.7 million. The share repurchases are comprised of the following programs:
Spin-off Obligations As part of our spin-off from Moody’s/The Dun & Bradstreet Corporation (“D&B2”) in 2000, Moody’s and D&B entered into a Tax Allocation Agreement dated as of September 30, 2000 (the “TAA”). During the years ended December 31, 2008 and 2007, we did not make a payment to Moody’s/D&B2 under the TAA. We made payments of $20.9 million to Moody’s/D&B2 during the year ended December 31, 2006 under the TAA which was fully accrued as of December 31, 2005. See “Future Liquidity—Sources and Uses of Funds” for further details. Future Liquidity—Sources and Uses of Funds Contractual Cash Obligations The following table quantifies, as of December 31, 2008, our contractual obligations that will require the use of cash in the future.
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In December 2003, we signed a three-year agreement with ICT Group, Inc. (“ICT”), effective January 2004, to outsource certain marketing call center activities, which contains two renewal options for up to a one year period. The agreement was amended effective September 2007 to be extended through 2011. Under the terms of the agreement, ICT will be responsible for performing certain marketing and credit-calling activities previously performed by our own call centers in North America. The obligation under the contract is based upon transmitted call volumes, but shall not be less than $3 million per contract year. We incurred costs of $3.2 million, $4.5 million and $4.1 million under this contract for the years ended December 31, 2008, 2007 and 2006, respectively. In October 2004, we signed a seven-year outsourcing agreement with International Business Machines (“IBM”). Under the terms of the agreement, we have transitioned certain portions of our data acquisition and delivery, customer service and financial processes to IBM. We may terminate this agreement for a fee at any time. We incurred costs of $30.1 million, $30.7 million and $25.5 million under this contract for the years ended December 31, 2008, 2007 and 2006, respectively. In July 2006, we signed a four-year product and technology outsourcing agreement with Acxiom Corporation in order to significantly increase the speed, data processing capacity and matching capabilities we provide our U.S. sales and marketing customers. In November 2008, we extended the term of the outsourcing agreement through 2011. In addition, in November 2008 we also entered into an agreement that will expand our service capabilities, enhance customer experience and accelerate the migration of the remaining existing D&B fulfilled processes to Acxiom. We incurred fulfillment costs of $7.5 million, $6.6 million and $1.5 million for the years ended December 31, 2008, 2007 and 2006, respectively.
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Capital Structure Every year we examine our capital structure and review our plans. During 2009, in connection with our focus on TSR, we anticipate continued share repurchases and cash dividends. We believe that cash provided by operating activities, supplemented as needed with readily available financing arrangements, is sufficient to meet our short-term needs, including the cash cost of restructuring charges, transition costs, contractual obligations and contingencies, excluding the legal matters identified herein for which exposures cannot be estimated. See Note 13 to our consolidated financial statements included in Item 8. of this Annual Report on Form 10-K. As we execute our long-term TSR strategy, which contemplates strategic acquisitions, we may require or consider additional financing to fund our TSR strategy. We regularly evaluate market conditions, our liquidity profile and various financing alternatives for opportunities to enhance our capital structure. While we feel confident that such financing arrangements are available to us, there can be no guarantee that we will be able to access new sources of liquidity when required.
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Table of ContentsThe recent and unprecedented disruption in the current economic environment has had a significant adverse impact on a number of commercial and financial institutions. At this point in time, our liquidity has not been impacted by the current credit environment and management does not expect that it will be materially impacted in the near-future. Management will continue to closely monitor our liquidity, the credit markets and our financial counterparties. However, management cannot predict with any certainty the impact to us of any further disruption in the credit environment. Share Repurchases and Dividends In order to mitigate the dilutive effect of the shares issued under our stock incentive plans and ESPP, our Board of Directors approved in August 2006, a four-year, five million share repurchase program. During the year ended December 31, 2008, we repurchased 0.9 million shares of common stock for $82.4 million under this program with 1.8 million shares remaining to be repurchased. In May 2007, our Board of Directors approved a $200 million, one-year share repurchase program which commenced in July 2007. During the year ended December 31, 2008, we repurchased 0.3 million shares of common stock of $26.8 million under this share repurchase program. This program was completed in February 2008. In December 2007, our Board of Directors approved a $400 million, two-year share repurchase program, which commenced in February 2008. During the year ended December, 2008, we repurchased 3.2 million shares of common stock for $272.7 million under this program with $127.3 million remaining under this program. We anticipate that the $400 million repurchase program will be completed by February 2010. In February 2009, our Board of Directors approved a new $200 million share repurchase program. This new program will begin at the completion of our existing $400 million, two-year share repurchase program. We are targeting our discretionary share repurchases of approximately $100 million to $150 million in 2009. In January 2009, our Board of Directors approved the declaration of a dividend of $0.34 per share for the first quarter of 2009. This cash dividend will be payable on March 20, 2009 to shareholders of record at the close of business on March 6, 2009. Potential Payments in Tax and Legal Matters We and our predecessors are involved in certain tax and legal proceedings, claims and litigation arising in the ordinary course of business. These matters are at various stages of resolution, but could ultimately result in significant cash payments as described in Note 13 to our consolidated financial statements included in Item 8. of this Annual Report on Form 10-K. We believe we have adequate reserves recorded in our consolidated financial statements for our share of current exposures in these matters, where applicable, as described therein. Pension Plan and Postretirement Benefit Plan Contribution Requirements For financial statement reporting purposes, the funded status of our pension plans, as determined in accordance with GAAP, had a deficit of $155.5 million, $235.8 million and $45.9 million for the U.S. Qualified Plan, the U.S. Non-Qualified Plans and the non-U.S. plans at December 31, 2008, as compared to a surplus of $274.7 million for the U.S. Qualified Plan, a deficit of $217.1 million for the U.S. Non-Qualified Plans, and a deficit of $60.0 million for the non-U.S. plans at December 31, 2007. The deterioration in the funded status of the U.S. plans was primarily due to significant asset loss in 2008 and lower discount rate at December 31, 2008. The improvement in the funded status of the non-U.S. plans was primarily due to a lower projected benefit obligation at December 31, 2008, primarily driven by a higher discount rate and positive impact from change in foreign currency exchange rates, partially offset by higher asset loss in 2008. See Note 10 to our consolidated financial statements included in Item 8. of this Annual Report on Form 10-K. During fiscal 2008, we were not required to make contributions to the U.S. Qualified Plan, the largest of our six plans, under funding regulations associated with the Pension Protection Act of 2006 (“PPA 2006”) as the plan was considered “fully funded” for the 2007 plan year. We do not expect to make any contributions to the U.S. Qualified Plan in fiscal 2009 for the 2008 plan year. In addition, we are not required to make quarterly contributions for the 2009 plan year. Final funding requirements for fiscal 2009 will be determined based on our January 2009 funding actuarial valuation.
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Table of ContentsWe expect to continue to make cash contributions to our other pension plans during the year ended December 31, 2009. The expected 2009 contribution is approximately $25.3 million, compared to $23.0 million in 2008. In addition, we expect to make benefit payments related to our postretirement benefit plan of approximately $9.7 million during the year ended December 31, 2009, compared to $6.9 million during the year ended December 31, 2008. See the Contractual Cash Obligations table above for projected contributions and benefit payments beyond 2009. In addition, we expect 2009 cash contributions to the 401(k) Plan to be in the range of approximately $7 million to $18 million compared to $19.2 million in 2008. See Note 18 to our consolidated financial statements included in Item 8. of this Annual Report on Form 10-K for changes to our 401(k) Plan. Off-Balance Sheet Arrangements and Related Party Transactions We do not have any transactions, obligations or relationships that could be considered off-balance sheet arrangements except for those disclosed in Note 7 to our consolidated financial statements included in Item 8. of this Annual Report on Form 10-K. Additionally, we have not engaged in any significant related-party transactions. Fair Value Measurements As described in Note 7 to our consolidated financial statements included in Item 8. of this Annual Report on Form 10-K, effective January 1, 2008, we adopted the provisions of SFAS No. 157, “Fair Value Measurements,” or “SFAS No. 157,” which defines fair value, establishes a framework for measuring fair value under generally accepted accounting principles in the United States of America and expands fair value measurement disclosures. However, we have deferred the application of SFAS No. 157 related to non-recurring non-financial assets and liabilities. As of December 31, 2008, we did not have any unobservable (Level 3) inputs in determining fair value. Forward-Looking Statements We may from time-to-time make written or oral “forward-looking” statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, including statements contained in filings with the Securities and Exchange Commission, in reports to shareholders and in press releases and investor Web casts. These forward-looking statements can be identified by the use of words like “anticipates,” “aspirations,” “believes,” “continues,” “estimates,” “expects,” “goals,” “guidance,” “intends,” “plans,” “projects,” “strategy,” “targets,” “commits,” “will” and other words of similar meaning. They can also be identified by the fact that they do not relate strictly to historical or current facts. We cannot guarantee that any forward-looking statement will be realized. Achievement of future results is subject to risks, uncertainties and inaccurate assumptions. Should known or unknown risks or uncertainties materialize, or should underlying assumptions prove inaccurate, actual results could vary materially from those anticipated, estimated or projected. Investors should bear this in mind as they consider forward-looking statements and whether to invest in, or remain invested in, our securities. In connection with the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995, we are identifying in the following paragraphs important factors that, individually or in the aggregate, could cause actual results to differ materially from those contained in any forward-looking statements made by us; any such statement is qualified by reference to the following cautionary statements. The following important factors could cause actual results to differ materially from those projected in such forward-looking statements:
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Table of ContentsWe elaborate on the above list of important factors throughout this document and in our other filings with the SEC, particularly in the discussion of our Risk Factors in Item 1A. of this Annual Report on Form 10-K. It should be understood that it is not possible to predict or identify all risk factors. Consequently, the above list of important factors and the Risk Factors discussed in Item 1A. of this Annual Report on Form 10-K should not be considered to be a complete discussion of all of our potential trends, risks and uncertainties. Except as otherwise required by federal securities laws, we do not undertake any obligation to update any forward-looking statement we may make from time-to-time.
Information in response to this Item is set forth under the caption “Market Risk” in Item 7. of this Annual Report on Form 10-K.
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Index to Financial Statements and Schedules
Schedules Schedules are omitted as they are not required or inapplicable or because the required information is provided in our consolidated financial statements, including the notes to our consolidated financial statements.
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Table of ContentsMANAGEMENT’S RESPONSIBILITY FOR FINANCIAL STATEMENTS Management is responsible for the preparation of the consolidated financial statements and related information appearing in this report. Management believes that the consolidated financial statements fairly reflect the form and substance of transactions and that the consolidated financial statements reasonably present our financial position and results of operations in conformity with generally accepted accounting principles in the United States of America. Management also has included in the consolidated financial statements amounts that are based on estimates and judgments which it believes are reasonable under the circumstances. An independent registered public accounting firm audits our consolidated financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States) and their report is provided herein. MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING Management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934, as amended. Management designed our internal control systems in order to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America. Our internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States, and that receipts and expenditures are being made only in accordance with authorizations of management and directors; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of our assets that could have a material effect on the financial statements. Management conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on its evaluation, our management concluded that our internal control over financial reporting was effective at the reasonable assurance level as of December 31, 2008. The effectiveness of our internal control over financial reporting as of December 31, 2008 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report, which is included herein.
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Table of ContentsREPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Shareholders and Board of Directors of The Dun & Bradstreet Corporation: In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, shareholders’ equity (deficit) and cash flows present fairly, in all material respects, the financial position of The Dun & Bradstreet Corporation and its subsidiaries at December 31, 2008 and December 31, 2007, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2008 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2008, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in “Management’s Report on Internal Control over Financial Reporting” appearing on page 66. Our responsibility is to express opinions on these financial statements and on the Company’s internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions. As discussed in Note 5, the Company adopted the provisions of FIN 48, “Accounting for Uncertainty in Income Taxes” in 2007 and, as discussed in Notes 10 and 11, the Company adopted the provisions of SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans” and SFAS No. 123R, “Share-Based Payments”, in 2006. A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. /s/ PricewaterhouseCoopers LLP Florham Park, New Jersey February 24, 2009
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Table of ContentsTHE DUN & BRADSTREET CORPORATION CONSOLIDATED STATEMENT OF OPERATIONS
The accompanying notes are an integral part of the consolidated financial statements.
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Table of ContentsTHE DUN & BRADSTREET CORPORATION CONSOLIDATED BALANCE SHEETS
The accompanying notes are an integral part of the consolidated financial statements.
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Table of ContentsTHE DUN & BRADSTREET CORPORATION CONSOLIDATED STATEMENT OF CASH FLOWS
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