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Equifax 10-Q 2005

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549


FORM 10-Q

(Mark One)

x                              QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2005

OR

o                                 TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     

Commission File Number: 001-06605


GRAPHIC

EQUIFAX INC.

(Exact name of registrant as specified in its charter)

Georgia

 

58-0401110

(State or other jurisdiction of
incorporation or organization)

 

(I.R.S. Employer
Identification No.)

1550 Peachtree Street, N.W., Atlanta, Georgia

 

30309

(Address of principal executive offices)

 

(Zip Code)

404-885-8000

(Registrant’s telephone number, including area code)

N/A

(Former name, former address and former fiscal year, if changed since last report)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  x    No  o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes  x    No  o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes   o    No  x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Class

 

Outstanding at October 31, 2005

Common Stock, $1.25 Par Value

 

129,868,318

 

 




EQUIFAX INC.
INDEX

Page
No.

PART I

Financial Information (Unaudited)

3

 

Item 1.

Financial Statements

3

 

 

Consolidated Balance Sheets—September 30, 2005 and December 31, 2004

3

 

 

Consolidated Statements of Income—Three Months Ended September 30, 2005
and 2004

4

 

 

Consolidated Statements of Income—Nine Months Ended September 30, 2005
and 2004

5

 

 

Consolidated Statements of Cash Flows—Nine Months Ended September 30, 2005
and 2004

6

 

 

Consolidated Statements of Shareholders’ Equity and Comprehensive Income (Loss)—Nine Months Ended September 30, 2005

7

 

 

Notes to Consolidated Financial Statements

8

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations 

22

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

37

 

Item 4.

Controls and Procedures

37

 

PART II

Other Information

38

 

Item 1.

Legal Proceedings

38

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

40

 

Item 6.

Exhibits

41

 

Signatures

42

 

Index to Exhibits

43

 

 

2




PART I. FINANCIAL INFORMATION

ITEM 1.                FINANCIAL STATEMENTS

EQUIFAX
CONSOLIDATED BALANCE SHEETS

 

 

September 30,
2005

 

December 31,
2004

 

 

 

(Unaudited)

 

 

 

 

 

(In millions, except
par values)

 

ASSETS

 

 

 

 

 

 

 

 

 

Current Assets:

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

 

$

41.5

 

 

 

$

52.1

 

 

Trade accounts receivable, net of allowance for doubtful accounts of $10.0 in 2005 and $9.3 in 2004

 

 

224.0

 

 

 

195.1

 

 

Deferred income tax assets

 

 

14.3

 

 

 

13.2

 

 

Other current assets

 

 

24.9

 

 

 

38.7

 

 

Current assets from discontinued operations

 

 

 

 

 

0.5

 

 

Total current assets

 

 

304.7

 

 

 

299.6

 

 

Property and Equipment:

 

 

 

 

 

 

 

 

 

Land, buildings and improvements

 

 

29.5

 

 

 

30.2

 

 

Data processing equipment and furniture

 

 

284.2

 

 

 

297.9

 

 

 

 

 

313.7

 

 

 

328.1

 

 

Less accumulated depreciation

 

 

175.7

 

 

 

189.8

 

 

 

 

 

138.0

 

 

 

138.3

 

 

Goodwill, net

 

 

832.7

 

 

 

747.5

 

 

Purchased Intangible Assets, net

 

 

332.0

 

 

 

281.3

 

 

Other Assets, net

 

 

105.6

 

 

 

90.5

 

 

 

 

 

$

1,713.0

 

 

 

$

1,557.2

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

Current Liabilities:

 

 

 

 

 

 

 

 

 

Short-term debt and current maturities

 

 

$

88.8

 

 

 

$

255.7

 

 

Accounts payable

 

 

5.1

 

 

 

9.7

 

 

Other current liabilities

 

 

202.4

 

 

 

191.2

 

 

Current liabilities of discontinued operations

 

 

 

 

 

0.3

 

 

Total current liabilities

 

 

296.3

 

 

 

456.9

 

 

Long-Term Debt

 

 

518.8

 

 

 

398.5

 

 

Deferred Revenue

 

 

4.1

 

 

 

9.8

 

 

Deferred Income Tax Liabilities

 

 

78.9

 

 

 

38.6

 

 

Other Long-Term Liabilities

 

 

117.2

 

 

 

129.8

 

 

Total liabilities

 

 

1,015.3

 

 

 

1,033.6

 

 

Commitments and Contingencies

 

 

 

 

 

 

 

 

 

Shareholders’ Equity:

 

 

 

 

 

 

 

 

 

Preferred stock, $0.01 par value: Authorized shares—10.0;  Issued shares—none

 

 

 

 

 

 

 

Common stock, $1.25 par value: Authorized shares—300.0;

 

 

 

 

 

 

 

 

 

Issued shares—184.7 in 2005 and 182.0 in 2004;

 

 

 

 

 

 

 

 

 

Outstanding shares—129.8 in 2005 and 129.4 in 2004

 

 

230.9

 

 

 

227.5

 

 

Paid-in capital

 

 

539.2

 

 

 

466.9

 

 

Retained earnings

 

 

1,467.7

 

 

 

1,298.8

 

 

Accumulated other comprehensive loss

 

 

(251.3

)

 

 

(267.0

)

 

Treasury stock, at cost, 50.3 shares in 2005 and 47.7 shares in 2004

 

 

(1,223.0

)

 

 

(1,133.4

)

 

Stock held by employee benefits trusts, at cost, 4.6 shares in 2005 and 4.9 shares in 2004

 

 

(65.8

)

 

 

(69.2

)

 

Total shareholders’ equity

 

 

697.7

 

 

 

523.6

 

 

 

 

 

$

1,713.0

 

 

 

$

1,557.2

 

 

 

See Notes to Consolidated Financial Statements.

3




EQUIFAX
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

 

 

THREE MONTHS ENDED
September 30,

 

 

 

       2005       

 

       2004        

 

 

 

(In millions, except per
share amounts)

 

Operating revenue

 

 

$

375.3

 

 

 

$

319.9

 

 

Costs and expenses:

 

 

 

 

 

 

 

 

 

Costs of services

 

 

153.0

 

 

 

134.4

 

 

Selling, general and administrative expenses

 

 

94.5

 

 

 

70.8

 

 

Depreciation and amortization

 

 

20.5

 

 

 

19.0

 

 

Total costs and expenses

 

 

268.0

 

 

 

224.2

 

 

Operating income

 

 

107.3

 

 

 

95.7

 

 

Other income, net

 

 

4.8

 

 

 

2.4

 

 

Minority interests in earnings, net of tax

 

 

(1.0

)

 

 

(0.8

)

 

Interest expense

 

 

(8.6

)

 

 

(9.2

)

 

Income from continuing operations before income taxes

 

 

102.5

 

 

 

88.1

 

 

Provision for income taxes

 

 

(40.0

)

 

 

(34.8

)

 

Income from continuing operations

 

 

62.5

 

 

 

53.3

 

 

Discontinued operations

 

 

 

 

 

 

 

 

 

Loss from discontinued operations, net of income tax expense of $0.0 in 2005 and $0.1 in 2004

 

 

 

 

 

(0.1

)

 

Net income

 

 

$

62.5

 

 

 

$

53.2

 

 

Per common share (basic):

 

 

 

 

 

 

 

 

 

Income from continuing operations

 

 

$

0.48

 

 

 

$

0.41

 

 

Discontinued operations

 

 

 

 

 

(0.01

)

 

Net income

 

 

$

0.48

 

 

 

$

0.40

 

 

Shares used in computing basic earnings per share

 

 

129.9

 

 

 

130.7

 

 

Per common share (diluted):

 

 

 

 

 

 

 

 

 

Income from continuing operations

 

 

$

0.47

 

 

 

$

0.40

 

 

Discontinued operations

 

 

 

 

 

 

 

Net income

 

 

$

0.47

 

 

 

$

0.40

 

 

Shares used in computing diluted earnings per share

 

 

132.5

 

 

 

132.5

 

 

Dividends per common share

 

 

$

0.04

 

 

 

$

0.03

 

 

 

See Notes to Consolidated Financial Statements.

4




EQUIFAX
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

 

 

NINE MONTHS ENDED
September 30,

 

 

 

     2005     

 

     2004     

 

 

 

(In millions,
except per share amounts)

 

Operating revenue

 

 

$

1,082.1

 

 

 

$

945.2

 

 

Costs and expenses:

 

 

 

 

 

 

 

 

 

Costs of services

 

 

443.3

 

 

 

394.8

 

 

Selling, general and administrative expenses

 

 

262.3

 

 

 

211.2

 

 

Depreciation and amortization

 

 

60.5

 

 

 

60.7

 

 

Asset impairment and related charges

 

 

 

 

 

2.4

 

 

Total costs and expenses

 

 

766.1

 

 

 

669.1

 

 

Operating income

 

 

316.0

 

 

 

276.1

 

 

Other income, net

 

 

9.9

 

 

 

45.4

 

 

Minority interests in earnings, net of tax

 

 

(3.6

)

 

 

(2.3

)

 

Interest expense

 

 

(27.5

)

 

 

(25.8

)

 

Income from continuing operations before income taxes

 

 

294.8

 

 

 

293.4

 

 

Provision for income taxes

 

 

(111.1

)

 

 

(111.3

)

 

Income from continuing operations

 

 

183.7

 

 

 

182.1

 

 

Discontinued operations

 

 

 

 

 

 

 

 

 

Loss from discontinued operations, net of income tax benefit of $0.0 in 2005 and $1.8 in 2004

 

 

 

 

 

(4.9

)

 

Net Income

 

 

$

183.7

 

 

 

$

177.2

 

 

Per common share (basic):

 

 

 

 

 

 

 

 

 

Income from continuing operations

 

 

$

1.42

 

 

 

$

1.38

 

 

Discontinued operations

 

 

 

 

 

(0.04

)

 

Net income

 

 

$

1.42

 

 

 

$

1.34

 

 

Shares used in computing basic earnings per share

 

 

129.8

 

 

 

131.8

 

 

Per common share (diluted):

 

 

 

 

 

 

 

 

 

Income from continuing operations

 

 

$

1.39

 

 

 

$

1.36

 

 

Discontinued operations

 

 

 

 

 

(0.04

)

 

Net income

 

 

$

1.39

 

 

 

$

1.32

 

 

Shares used in computing diluted earnings per share

 

 

132.6

 

 

 

133.8

 

 

Dividends per common share

 

 

$

0.11

 

 

 

$

0.08

 

 

 

See Notes to Consolidated Financial Statements.

5




EQUIFAX
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

 

 

NINE MONTHS ENDED
September 30,

 

 

 

     2005     

 

     2004     

 

 

 

(In millions)

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

 

Net income

 

 

$

183.7

 

 

 

$

177.2

 

 

Adjustments to reconcile net income to net cash provided by operating activities of continuing operations:

 

 

 

 

 

 

 

 

 

Gain on sale of investment in Intersections Inc.

 

 

 

 

 

(36.8

)

 

Loss from discontinued operations

 

 

 

 

 

4.9

 

 

Depreciation and amortization

 

 

60.5

 

 

 

60.7

 

 

Asset impairment and related charges

 

 

 

 

 

2.4

 

 

Income tax benefit from stock plans

 

 

13.0

 

 

 

4.4

 

 

Deferred income taxes

 

 

13.7

 

 

 

14.0

 

 

Changes in assets and liabilities, excluding effects of acquisitions:

 

 

 

 

 

 

 

 

 

Accounts receivable, net

 

 

(21.4

)

 

 

(22.5

)

 

Current liabilities, excluding debt

 

 

(4.5

)

 

 

5.3

 

 

Other current assets

 

 

10.9

 

 

 

4.5

 

 

Other long-term liabilities, excluding debt

 

 

(11.8

)

 

 

1.9

 

 

Other assets

 

 

(12.3

)

 

 

(10.3

)

 

Other

 

 

 

 

 

(0.1

)

 

Cash provided by operating activities

 

 

231.8

 

 

 

205.6

 

 

Investing activities:

 

 

 

 

 

 

 

 

 

Additions to property and equipment

 

 

(33.3

)

 

 

(33.0

)

 

Acquisitions, net of cash acquired

 

 

(121.8

)

 

 

(17.4

)

 

Proceeds from sale of investments

 

 

10.1

 

 

 

59.4

 

 

Deferred payments on prior year acquisitions

 

 

 

 

 

(1.4

)

 

Cash (used) provided by investing activities

 

 

(145.0

)

 

 

7.6

 

 

Financing activities:

 

 

 

 

 

 

 

 

 

Net short-term borrowings (payments)

 

 

88.6

 

 

 

(133.1

)

 

Additions to long-term debt

 

 

180.1

 

 

 

 

 

Payments on long-term debt

 

 

(310.0

)

 

 

(0.6

)

 

Treasury stock purchases

 

 

(95.0

)

 

 

(103.0

)

 

Dividends paid

 

 

(14.8

)

 

 

(11.0

)

 

Proceeds from exercise of stock options

 

 

47.7

 

 

 

22.5

 

 

Other

 

 

6.5

 

 

 

(2.1

)

 

Cash used by financing activities

 

 

(96.9

)

 

 

(227.3

)

 

Effect of foreign currency exchange rates on cash

 

 

(0.5

)

 

 

(3.7

)

 

Cash provided by discontinued operations

 

 

 

 

 

1.6

 

 

Decrease in cash and cash equivalents

 

 

(10.6

)

 

 

(16.2

)

 

Cash and cash equivalents, beginning of year

 

 

52.1

 

 

 

38.1

 

 

Cash and cash equivalents, end of period

 

 

$

41.5

 

 

 

$

21.9

 

 

 

See Notes to Consolidated Financial Statements.

6




EQUIFAX

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY AND

COMPREHENSIVE INCOME (LOSS) (UNAUDITED)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

Held By

 

 

 

 

 

Common Stock:

 

 

 

 

 

Other

 

 

 

Employee

 

Total

 

 

 

Shares

 

 

 

Paid-In

 

Retained

 

Comprehensive

 

Treasury

 

Benefits

 

Shareholders’

 

 

 

Outstanding

 

Amount

 

Capital

 

Earnings

 

Loss

 

Stock

 

Trusts

 

Equity

 

 

 

(In millions)

 

Balance, December 31, 2004

 

 

129.4

 

 

 

$

227.5

 

 

 

$

466.9

 

 

 

$

1,298.8

 

 

 

$

(267.0

)

 

$

(1,133.4

)

 

$

(69.2

)

 

 

$

523.6

 

 

Net income

 

 

 

 

 

 

 

 

 

 

 

183.7

 

 

 

 

 

 

 

 

 

 

183.7

 

 

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

15.7

 

 

 

 

 

 

 

15.7

 

 

Shares issued under stock plans

 

 

2.5

 

 

 

3.4

 

 

 

52.4

 

 

 

 

 

 

 

 

(5.4

)

 

 

 

 

50.4

 

 

Shares issued under benefits plans

 

 

0.3

 

 

 

 

 

 

2.5

 

 

 

 

 

 

 

 

 

 

3.4

 

 

 

5.9

 

 

Shares issued under treasury stock

 

 

0.4

 

 

 

 

 

 

4.0

 

 

 

 

 

 

 

 

10.8

 

 

 

 

 

14.8

 

 

Income tax benefit from stock plans

 

 

 

 

 

 

 

 

13.0

 

 

 

 

 

 

 

 

 

 

 

 

 

13.0

 

 

Treasury stock purchased

 

 

(2.8

)

 

 

 

 

 

 

 

 

 

 

 

 

 

(95.0

)

 

 

 

 

(95.0

)

 

Cash dividends

 

 

 

 

 

 

 

 

 

 

 

(14.8

)

 

 

 

 

 

 

 

 

 

(14.8

)

 

Dividends from employee benefits trusts

 

 

 

 

 

 

 

 

0.4

 

 

 

 

 

 

 

 

 

 

 

 

 

0.4

 

 

Balance, Septebmer 30, 2005 (Unaudited)

 

 

129.8

 

 

 

$

230.9

 

 

 

$

539.2

 

 

 

$

1,467.7

 

 

 

$

(251.3

)

 

$

(1,223.0

)

 

$

(65.8

)

 

 

$

697.7

 

 

 

Accumulated Other Comprehensive Loss consists of the following components:

 

 

September 30,

 

December 31,

 

 

 

2005

 

2004

 

 

 

(Unaudited)

 

 

 

 

 

(In millions)

 

Foreign currency translation

 

 

$

(132.1

)

 

 

$

(148.2

)

 

Minimum pension liability, net of accumulated tax of $70.2 in 2005 and 2004

 

 

(118.0

)

 

 

(117.0

)

 

Cash flow hedging transactions, net of tax of $1.0 in 2005 and $1.1 in 2004

 

 

(1.2

)

 

 

(1.8

)

 

 

 

 

$

(251.3

)

 

 

$

(267.0

)

 

 

Comprehensive Income is as follows:

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

 

 

2005

 

2004

 

2005

 

2004

 

 

 

(Unaudited)

 

(Unaudited)

 

(Unaudited)

 

(Unaudited)

 

 

 

(In millions)

 

Net income

 

 

$

62.5

 

 

 

$

53.2

 

 

 

$

183.7

 

 

 

$

177.2

 

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustment

 

 

15.0

 

 

 

17.6

 

 

 

16.1

 

 

 

3.0

 

 

Change in cumulative loss from cash flow hedging transactions

 

 

0.4

 

 

 

(0.3

)

 

 

0.6

 

 

 

0.3

 

 

Supplemental retirement plan minimum liability adjustment

 

 

 

 

 

 

 

 

(1.0

)

 

 

1.0

 

 

 

 

 

$

77.9

 

 

 

$

70.5

 

 

 

$

199.4

 

 

 

$

181.5

 

 

 

See Notes to Consolidated Financial Statements.

7




EQUIFAX
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
September 30, 2005

As used herein, the terms “Equifax,” “the Company,” “we,” “our” and “us” refer to Equifax Inc., a Georgia corporation, and its consolidated subsidiaries as a combined entity, except where it is clear that the terms mean only Equifax Inc.

1.   BASIS OF PRESENTATION

We have prepared the accompanying unaudited Consolidated Financial Statements in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. This information reflects all adjustments which in the opinion of management are necessary for a fair presentation of the statement of financial position as of September 30, 2005, and the results of operations for the three and nine month periods ending September 30, 2005 and 2004 and the cash flows for the nine month periods ending September 30, 2005 and 2004. All adjustments made have been of a normal recurring nature. Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted. We believe that the disclosures are adequate to make the information presented not misleading. Certain prior year amounts have been reclassified to conform to the current year presentation. These Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements and the notes thereto included in our annual report on Form 10-K/A for the fiscal year ended December 31, 2004 (“2004 Form 10-K”). That report includes a summary of our critical accounting policies. There have been no material changes in our accounting policies during fiscal 2005.

Use of Estimates.   The preparation of financial statements in conformity with GAAP requires our management to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements as well as reported amounts of revenues and expenses during the reporting period. Actual results could differ materially from these estimates.

Earnings Per Share.   Our basic earnings per share (“EPS”) is calculated as income from continuing operations or net income divided by the weighted average number of common shares outstanding during the period. Diluted EPS is calculated to reflect the potential dilution that would occur if stock options or other contracts to issue common stock were exercised and resulted in additional common shares outstanding. The income amounts used in both our basic and diluted EPS calculations is the same. A reconciliation of the weighted average outstanding shares used in the two calculations is as follows:

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

 

 

    2005    

 

    2004    

 

    2005    

 

    2004    

 

 

 

(In millions)

 

Weighted average shares outstanding (basic)

 

 

129.9

 

 

 

130.7

 

 

 

129.8

 

 

 

131.8

 

 

Effect of dilutive securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock options

 

 

2.0

 

 

 

1.3

 

 

 

2.2

 

 

 

1.5

 

 

Long-term incentive plans

 

 

0.6

 

 

 

0.5

 

 

 

0.6

 

 

 

0.5

 

 

Weighted average shares outstanding (diluted)

 

 

132.5

 

 

 

132.5

 

 

 

132.6

 

 

 

133.8

 

 

 

8




Stock-Based Compensation.   In accordance with the accounting provisions of Statement of Financial Accounting Standards (“SFAS”) No. 123, “Accounting for Stock-Based Compensation,” (“SFAS No. 123”) and SFAS No. 148, “Accounting for Stock-Based Compensation—Transitional Disclosure,” we have elected to apply Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees,” (“APB No. 25”) and related interpretations in accounting for our stock option and performance share plans. Accordingly, by our use of the intrinsic value method to account for stock-based employee compensation, we do not recognize compensation cost in connection with our stock options since the strike price was equal to the fair value of the underlying stock on the date of grant.

The fair value for these options was estimated at the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions:

 

 

September 30, 2005

 

September 30, 2004

 

Expected Life in Years

 

 

4.5

 

 

 

4.6

 

 

Risk Free Interest Rate

 

 

3.68

%

 

 

3.19

%

 

Volatility

 

 

31.44

%

 

 

33.70

%

 

Dividend Yield

 

 

0.5

%

 

 

0.5

%

 

 

If we had elected to recognize compensation cost for these plans based on the fair value at grant date as prescribed by SFAS No. 123, net income and net income per share would have been reduced to the pro forma amounts indicated in the table below:

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

 

 

    2005    

 

    2004    

 

    2005    

 

    2004    

 

 

 

(In millions, except per share data)

 

Net income, as reported

 

 

$

62.5

 

 

 

$

53.2

 

 

 

$

183.7

 

 

 

$

177.2

 

 

Add: Total stock-based employee compensation expense, net of related tax effect, included in reported net income

 

 

1.3

 

 

 

0.3

 

 

 

3.7

 

 

 

1.0

 

 

Deduct: Total stock-based employee compensation expense determined under fair value-based method for all awards, net of related tax effects

 

 

(3.0

)

 

 

(1.9

)

 

 

(8.6

)

 

 

(5.1

)

 

Pro forma net income

 

 

$

60.8

 

 

 

$

51.6

 

 

 

$

178.8

 

 

 

$

173.1

 

 

Earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic—as reported

 

 

$

0.48

 

 

 

$

0.40

 

 

 

$

1.42

 

 

 

$

1.34

 

 

Basic—pro forma

 

 

$

0.47

 

 

 

$

0.39

 

 

 

$

1.38

 

 

 

$

1.32

 

 

Diluted—as reported

 

 

$

0.47

 

 

 

$

0.40

 

 

 

$

1.39

 

 

 

$

1.32

 

 

Diluted—pro forma

 

 

$

0.46

 

 

 

$

0.39

 

 

 

$

1.35

 

 

 

$

1.31

 

 

 

2.   NATURE OF OPERATIONS

We collect, organize and manage various types of financial, demographic and marketing information. Our products and services enable businesses to make credit and marketing decisions, manage their portfolio risk and develop marketing strategies concerning consumers and commercial enterprises. We serve customers across a wide range of industries, including the financial services, mortgage, retail, telecommunications, utilities, automotive, brokerage, healthcare and insurance industries, as well as state and federal government entities. We also enable consumers to manage and protect their financial health through a portfolio of products offered directly to individuals. We have approximately 4,600 employees worldwide and manage our business globally through the following three reportable segments: Equifax

9




North America, Equifax Europe and Equifax Latin America. Our operations are predominantly located within the U.S., with foreign operations principally located in Canada, the U.K. and Brazil.

Our products and services are categorized as follows: Information Services, Marketing Services and Personal Solutions. Information Services products, services and databases allow customers to make real time risk and marketing decisions about consumers and commercial enterprises. Marketing Services information products and databases enable customers to identify a target audience for marketing various products and services and Personal Solutions products and services provide information to consumers which enable them to reduce their exposure to identity fraud and to better manage their credit health.

We develop, maintain and enhance secured proprietary information databases through compilation of accounts receivable information about consumers and businesses that we obtain from a variety of sources, such as credit granting institutions, public record information, including bankruptcies, liens and judgments and marketing information from surveys and warranty cards. We process this information utilizing our proprietary information management systems and make it available to our customers in virtually any medium or format they choose.

3.   ACQUISITIONS

On August 29, 2005, we acquired BeNow Inc. (“BeNow”), a provider of leading edge solutions to multi-channel marketers, as a part of our Marketing Services business. BeNow combines database management and analytics to support customer marketing campaigns and optimize market opportunities in particular industries. We paid a total of approximately $17.5 million in cash to the stockholders of BeNow. The net cash impact to us of the acquisition was approximately $16.7 million. We financed the purchase price of the acquisition through available cash and approximately $5.9 million in short-term borrowings.

To broaden and further strengthen our enabling technologies capabilities in our North America Information Services business, we acquired APPRO Systems, Inc. (“APPRO”) on March 15, 2005. APPRO provides automated credit risk management and financial technologies for consumer, commercial and retail banking lending operations. We paid a total of approximately $91.5 million in cash to the stockholders and option holders of APPRO. The net cash impact to us of the acquisition was approximately $74.9 million after disposition of certain assets. We financed the purchase price of the acquisition through available cash and approximately $72.0 million in borrowings under our existing trade receivables-backed revolving credit facility.

During the first nine months of 2005, in order to continue to grow our credit data business, we acquired the credit files, contractual rights to territories (generally states or integration areas) and customer relationships and related businesses of two independent credit reporting agencies in the U.S. and one in Canada that house consumer information on our system.

10




The above acquisitions were accounted for as purchases and had a total cash purchase price of $129.1 million. The purchase of one U.S. independent credit reporting agency was paid for primarily with the issuance of 0.4 million shares of Equifax treasury stock. The following table summarizes the estimated fair value of the net assets acquired and the liabilities assumed at the acquisition dates. These allocations are preliminary estimates and will be finalized upon completion of the purchase valuation of the acquired assets and liabilities.

 

 

2005

 

 

 

(In millions)

 

Current assets

 

 

$

27.7

 

 

Property and equipment

 

 

4.8

 

 

Other assets

 

 

0.1

 

 

Purchased intangible assets

 

 

76.4

 

 

Deferred tax assets

 

 

2.8

 

 

Goodwill

 

 

66.5

 

 

Total acquired assets

 

 

178.3

 

 

Total liabilities

 

 

34.5

 

 

Net assets acquired

 

 

$

143.8

 

 

 

The results of operations for these acquisitions have been included in the Consolidated Statements of Income from their respective dates of acquisition and have not been material.

4.   OTHER CURRENT ASSETS

Other current assets.   Other current assets at September 30, 2005 and December 31, 2004 consist of the following:

 

 

September 30,
2005

 

December 31,
2004

 

 

 

(In millions)

 

Prepaid expenses

 

 

$

19.1

 

 

 

$

17.1

 

 

Other current assets

 

 

5.8

 

 

 

21.6

 

 

Total other current assets

 

 

$

24.9

 

 

 

$

38.7

 

 

 

5.   GOODWILL AND PURCHASED INTANGIBLE ASSETS

Goodwill.   Goodwill allocated to our reporting units at January 1, 2005 and changes in the carrying amount of goodwill for the first nine months of 2005 are as follows:

 

 

Reporting Units

 

 

 

 

 

Information
Services

 

Marketing
Services

 

Personal
Solutions

 

European
Operations

 

Latin America
Operations

 

Corporate

 

Total

 

 

 

(In millions)

 

Balance, January 1, 2005

 

 

$

212.1

 

 

 

$

275.9

 

 

 

$

1.8

 

 

 

$

117.7

 

 

 

$

134.2

 

 

 

$

5.9

 

 

$

747.5

*

Acquisitions

 

 

54.4

 

 

 

12.1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

66.5

 

Adjustments

 

 

1.7

 

 

 

(1.8

)

 

 

 

 

 

 

 

 

6.7

 

 

 

 

 

6.6

 

Foreign currency translation 

 

 

1.6

 

 

 

 

 

 

 

 

 

(9.9

)

 

 

20.3

 

 

 

 

 

12.0

 

Balance, September 30, 2005

 

 

$

269.8

 

 

 

$

286.2

 

 

 

$

1.8

 

 

 

$

107.8

 

 

 

$

161.2

 

 

 

$

5.9

 

 

$

832.7

*


*                    Does not total due to rounding

11




Goodwill is the cost in excess of the fair value of the net assets of acquired businesses. SFAS No. 142, “Goodwill and Other Intangible Assets,” requires that reporting unit goodwill be evaluated and tested for impairment at least on an annual basis. Accordingly, we performed our impairment evaluation as of September 30, 2005 which resulted in no impairment. However, future goodwill impairment tests could result in a charge to earnings. We will continue to evaluate goodwill annually or whenever events and circumstances indicate that there may be an impairment of the asset value.

The acquisitions in the table above relate primarily to the APPRO and BeNow acquisitions, as discussed in Note 3 of the Notes to Consolidated Financial Statements in this Form 10-Q.

Purchased Intangible Assets.   Purchased intangible assets, as recorded on the accompanying Consolidated Balance Sheets, represent the estimated fair value of acquired intangible assets used in our products and services. Purchased data files, net, is the carrying value of files acquired primarily through the purchase of independent credit reporting agencies in the U.S. and Canada. We expense the cost of modifying and updating credit files in the period such costs are incurred. Purchased intangible assets at September 30, 2005 and December 31, 2004 consist of the following:

 

 

September 30, 2005

 

December 31, 2004

 

 

 

Gross

 

Accumulated
amortization

 

Net

 

Gross

 

Accumulated
amortization

 

Net

 

 

 

(In millions)

 

Purchased data files

 

$

399.8

 

 

$

(170.7

)

 

$

229.1

 

$

405.4

 

 

$

(171.7

)

 

$

233.7

 

Acquired software

 

39.4

 

 

(10.8

)

 

28.6

 

10.4

 

 

(8.2

)

 

2.2

 

Non-compete agreements

 

11.5

 

 

(8.2

)

 

3.3

 

11.7

 

 

(7.3

)

 

4.4

 

Contractual and territorial rights

 

48.9

 

 

 

 

48.9

 

41.0

 

 

 

 

41.0

 

Customer relationships

 

21.9

 

 

(0.5

)

 

21.4

 

 

 

 

 

 

Purchased trademarks

 

0.8

 

 

(0.1

)

 

0.7