<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999
----------------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period ended
----------------------------------
Commission File Number 1-6605
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EQUIFAX INC.
- -------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Georgia 58-0401110
- ------------------------------------------ -----------------------------------
(State or other jurisdiction of (I.R.S.Employer
incorporation or organization) Identification No.)
1550 Peachtree Street, N.W. Atlanta, Georgia
P.O. Box 4081, Atlanta, Georgia 30302
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(Address of principal executive offices) (Zip Code)
404-885-8000
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(Registrant's telephone number, including area code)
None
- -------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed
since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
----- -----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at September 30, 1999
----- ----------------------------------------
Common Stock, $1.25 Par Value 141,436,462
<PAGE>
INDEX
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets --
September 30, 1999 and December 31, 1998 2 - 3
Consolidated Statements of Income --
Three Months Ended September 30, 1999 and 1998 4
Consolidated Statements of Income --
Nine Months Ended September 30, 1999 and 1998 5
Consolidated Statement of Shareholders' Equity --
Nine Months Ended September 30, 1999 6
Consolidated Statements of Cash Flows --
Nine Months Ended September 30, 1999 and 1998 7
Notes to Consolidated Financial Statements 8 - 11
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12 - 18
Item 3. Quantitative and Qualitative Disclosures About Market Risk 18
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K 19
</TABLE>
1
<PAGE>
PART I. FINANCIAL INFORMATION
------------------------------
<TABLE>
<CAPTION>
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, DECEMBER 31,
(In thousands) 1999 1998
- ------------------------------------------------------------------------
(Unaudited)
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 137,109 $ 90,617
Trade accounts receivable, net 288,707 298,201
Other receivables 40,258 54,904
Deferred income tax assets 24,122 26,223
Other current assets 48,501 50,420
---------- ----------
Total current assets 538,697 520,365
---------- ----------
PROPERTY AND EQUIPMENT:
Land, buildings and improvements 29,314 30,963
Data processing equipment and furniture 247,402 239,391
---------- ----------
276,716 270,354
Less accumulated depreciation 168,154 151,016
---------- ----------
108,562 119,338
---------- ----------
GOODWILL 605,708 719,662
---------- ----------
PURCHASED DATA FILES 154,431 173,473
---------- ----------
OTHER ASSETS 305,036 295,957
---------- ----------
$1,712,434 $1,828,795
========== ==========
</TABLE>
The notes on pages 8 through 11 are an integral part of these consolidated
balance sheets.
2
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30 DECEMBER 31,
(In thousands, except par value) 1999 1998
- -------------------------------------------------------------------------------------
(Unaudited)
LIABILITIES AND SHAREHOLDERS' EQUITY
<S> <C> <C>
CURRENT LIABILITIES:
Short-term debt and current maturities of long-term debt $ 43,604 $ 47,387
Accounts payable 137,973 107,346
Accrued salaries and bonuses 36,944 37,973
Income taxes payable 3,254 9,518
Other current liabilities 177,087 216,955
---------- ----------
Total current liabilities 398,862 419,179
---------- ----------
LONG-TERM DEBT, LESS CURRENT MATURITIES 938,988 869,486
---------- ----------
LONG-TERM DEFERRED REVENUE 24,970 32,465
---------- ----------
DEFERRED INCOME TAX LIABILITIES 57,735 50,132
---------- ----------
OTHER LONG-TERM LIABILITIES 93,830 91,067
---------- ----------
COMMITMENTS AND CONTINGENCIES (Note 5)
SHAREHOLDERS' EQUITY:
Common stock, $1.25 par value; shares authorized -
300,000; issued - 174,208 in 1999 and 173,722 in 1998;
outstanding - 135,813 in 1999 and 140,042 in 1998 217,760 217,153
Preferred stock, $0.01 par value; shares authorized -
10,000; issued and outstanding - none in 1999 or 1998 -- --
Paid-in capital 301,825 286,511
Retained earnings 678,099 562,911
Accumulated other comprehensive loss (Note 4) (172,512) (35,063)
Treasury stock, at cost, 32,772 shares in 1999
and 27,698 shares in 1998 (771,710) (606,092)
Stock held by employee benefits trusts, at cost,
5,624 shares in 1999 and 5,983 shares in 1998 (55,413) (58,954)
---------- ----------
Total shareholders' equity 198,049 366,466
---------- ----------
$1,712,434 $1,828,795
========== ==========
</TABLE>
The notes on pages 8 through 11 are an integral part of these consolidated
balance sheets.
3
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
THREE MONTHS ENDED
SEPTEMBER 30,
(In thousands, except per share amounts) 1999 1998
- --------------------------------------------------------------------------------
<S> <C> <C>
Operating revenue $ 444,365 $ 425,414
--------- ---------
Costs of services 252,126 246,509
Selling, general and administrative expenses 80,070 79,258
--------- ---------
Total operating expenses 332,196 325,767
--------- ---------
Operating income 112,169 99,647
Other income, net 1,109 3,384
Interest expense (15,140) (12,719)
--------- ---------
Income before income taxes 98,138 90,312
Provision for income taxes 40,040 36,783
--------- ---------
Net income $ 58,098 $ 53,529
========= =========
Per common share (basic):
Net income $ 0.42 $ 0.38
========= =========
Shares used in computing basic earnings per share 137,268 141,794
========= =========
Per common share (diluted):
Net income $ 0.42 $ 0.37
========= =========
Shares used in computing diluted earnings per share 139,303 144,863
========= =========
Dividends per common share $ 0.0900 $ 0.0875
========= =========
</TABLE>
The notes on pages 8 through 11 are an integral part of these consolidated
statements.
4
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30,
(In thousands, except per share amounts) 1999 1998
- --------------------------------------------------------------------------------
<S> <C> <C>
Operating revenue $1,308,455 $1,171,972
---------- ----------
Costs of services 757,614 680,509
Selling, general and administrative expenses 252,982 218,639
---------- ----------
Total operating expenses 1,010,596 899,148
---------- ----------
Operating income 297,859 272,824
Other income, net (Note 6) 10,131 4,754
Interest expense (45,566) (27,973)
---------- ----------
Income before income taxes 262,424 249,605
Provision for income taxes 108,319 100,709
---------- ----------
Net income $ 154,105 $ 148,896
========== ==========
Per common share (basic):
Net income $ 1.12 $ 1.05
========== ==========
Shares used in computing basic earnings per share 138,167 141,621
========== ==========
Per common share (diluted):
Net income $ 1.10 $ 1.03
========== ==========
Shares used in computing diluted earnings per share 140,468 144,651
========== ==========
Dividends per common share $ 0.2700 $ 0.2625
========== ==========
</TABLE>
The notes on pages 8 through 11 are an integral part of these consolidated
statements.
5
<PAGE>
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
(In thousands) SEPTEMBER 30, 1999
- -----------------------------------------------------------------------------------------------------
<S> <C>
COMMON STOCK:
Balance at beginning of period $ 217,153
Shares issued under stock plans 607
---------
Balance at end of period $ 217,760
=========
PAID-IN CAPITAL:
Balance at beginning of period $ 286,511
Shares issued under stock plans 6,799
Adjustment for shares contributed to U.S. retirement plan by an employee
benefits trust 7,003
Other 1,512
---------
Balance at end of period $ 301,825
=========
RETAINED EARNINGS:
Balance at beginning of period $ 562,911
Net income 154,105
Cash dividends paid (38,917)
---------
Balance at end of period $ 678,099
=========
ACCUMULATED OTHER COMPREHENSIVE LOSS (Note 4):
Balance at beginning of period $ (35,063)
Adjustment during period (137,449)
---------
Balance at end of period $(172,512)
=========
TREASURY STOCK:
Balance at beginning of period $(606,092)
Cost of shares repurchased (165,618)
---------
Balance at end of period $(771,710)
=========
STOCK HELD BY EMPLOYEE BENEFITS TRUSTS:
Balance at beginning of period $ (58,954)
Cost of shares reissued under stock plans 544
Cost of shares contributed to U.S. retirement plan 2,997
---------
Balance at end of period $ (55,413)
=========
</TABLE>
The notes on pages 8 through 11 are an integral part of this consolidated
statement.
6
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30,
(In thousands) 1999 1998
- -----------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 154,105 $ 148,896
Adjustments to reconcile net income to net cash
cash provided by operating activities:
Depreciation and amortization 93,106 72,343
Gain from sale of businesses (7,095) --
Changes in assets and liabilities:
Trade and other receivables, net 17,619 (27,104)
Current liabilities, excluding debt (9,698) 44,092
Other current assets 3,535 (11,679)
Deferred income taxes 11,754 10,950
Other long-term liabilities, excluding debt (165) (14,023)
Other assets (5,438) (17,010)
--------- ---------
Net cash provided by operating activities 257,723 206,465
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment (22,859) (35,026)
Additions to other assets, net (63,305) (49,146)
Acquisitions, net of cash acquired (12,859) (474,655)
Proceeds from sale of businesses 25,957 --
Investments in unconsolidated affiliates -- (18,778)
--------- ---------
Net cash used in investing activities (73,066) (577,605)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net short-term borrowings (728) 32,220
Net additions to long-term debt 67,378 499,216
Dividends paid (38,917) (38,873)
Treasury stock purchases (165,618) (97,447)
Proceeds from exercise of stock options 6,396 9,009
Other 2,280 2,571
--------- ---------
Net cash (used in) provided by financing activities (129,209) 406,696
--------- ---------
Effect of foreign currency exchange rates on cash (8,956) (1,872)
--------- ---------
Net cash provided 46,492 33,684
Cash and cash equivalents, beginning of period 90,617 52,251
--------- ---------
Cash and cash equivalents, end of period $ 137,109 $ 85,935
========= =========
</TABLE>
The notes on pages 8 through 11 are an integral part of these consolidated
statements.
7
<PAGE>
EQUIFAX INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
September 30, 1999
1. BASIS OF PRESENTATION:
The financial statements included herein have been prepared by the Company
pursuant to the rules and regulations of the Securities and Exchange Commission.
This information reflects all adjustments which are, in the opinion of
management, necessary for a fair presentation of the statement of financial
position of the Company as of September 30, 1999, the results of operations
for the three and nine months ended September 30, 1999 and 1998, and the cash
flows for the nine months ended September 30, 1999 and 1998. All adjustments
made have been of a normal recurring nature. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted.
The Company believes that the disclosures are adequate to make the information
presented not misleading. It is suggested that these financial statements be
read in conjunction with the financial statements and the notes thereto included
in the Company's annual report on Form 10-K for the year ended December 31,
1998.
2. NATURE OF OPERATIONS:
The Company principally provides information services to businesses to help them
grant credit and authorize and process credit card and check transactions. The
principal lines of business are information services and payment services (see
Note 7 for segment information). The principal markets for both information and
payment services are retailers, banks and other financial institutions, with
information services also serving the telecommunications and utility industries.
The Company's operations are predominately located within the United States,
with foreign operations principally located within Canada, the United Kingdom
and Brazil.
3. USE OF ESTIMATES:
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions.
These estimates and assumptions affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements as well as reported amounts of revenues and expenses
during the reporting period. Actual results could differ from these estimates.
4. SHAREHOLDERS' EQUITY:
Treasury Stock. During the first nine months of 1999, the Company repurchased
5,074,000 of its common shares through open market transactions at an aggregate
cost of $165,618,000. As of September 30, 1999, approximately $145 million
remained authorized for future share repurchases.
Stock Held by Employee Benefits Trusts. During the third quarter of 1999, one
of the Company's employee benefits trusts contributed 304,183 shares of Equifax
stock with a market value of approximately $10 million to the Company's U.S.
Retirement Plan.
Comprehensive Income. Effective with the first quarter 1998, the Company
adopted FASB Statement No. 130, "Reporting Comprehensive Income". For the nine-
month periods ending September 30, 1999 and 1998, comprehensive income is as
follows:
8
<PAGE>
Nine Months Ended
September 30
------------------------
(in thousands) 1999 1998
- -------------- --------- --------
Net income $ 154,105 $148,896
Change in cumulative foreign
currency translation adjustment (137,449) (3,745)
--------- --------
Comprehensive income $ 16,656 $145,151
========= ========
Accumulated other comprehensive loss at September 30, 1999 and December 31, 1998
consists of the following components:
(in thousands) September 30, 1999 December 31, 1998
- -------------- ------------------ -----------------
Cumulative foreign currency
translation adjustment $(166,446) $(28,997)
Adjustment for minimum liability
under supplemental retirement plan (6,066) (6,066)
--------- --------
$(172,512) $(35,063)
========= ========
5. AGREEMENT WITH COMPUTER SCIENCES CORPORATION:
The Company has an agreement with Computer Sciences Corporation (CSC) under
which CSC-owned credit bureaus and certain CSC affiliate bureaus utilize the
Company's credit database service. CSC and these affiliates retain ownership of
their respective credit files and the revenues generated by their credit
reporting activity. The Company receives a processing fee for maintaining the
database and for each report supplied. The initial term of the agreement expired
in July 1998, and was renewable at the option of CSC for successive ten-year
periods. CSC has renewed the agreement for the ten-year period beginning August
1, 1998. The agreement provides CSC with an option to sell its credit reporting
businesses to the Company, and provides the Company with an option to purchase
CSC's credit reporting businesses if CSC does not elect to renew the agreement
or if there is a change in control of CSC while the agreement is in effect. Both
options expire in 2013. As of August 1, 1998, the option price is determined by
appraisal.
6. ACQUISITIONS AND DIVESTITURES:
During the first nine months of 1999, the Company acquired the credit files of
ten affiliates located in the United States and two affiliates in Canada. They
were accounted for as purchases, had a total purchase price of $14.9 million,
and were acquired for cash. These acquisitions resulted in $4.7 million of
goodwill and $9.8 million of purchased data files. Their results of operations
have been included in the consolidated statements of income from the dates of
acquisition and were not material.
In April 1999, the Company sold its 34% equity investment in Proceda S.A. in
Brazil, and in June 1999, also sold three risk management offices located in the
U.S. Proceeds from these sales totaled $26.0 million and resulted in a gain of
$7.1 million recorded in "Other income, net" ($2.9 million after tax, or $.02
per share).
7. SEGMENT INFORMATION:
Effective with the first quarter of 1998, the Company adopted FASB Statement No.
131, "Disclosures About Segments of an Enterprise and Related Information". In
the first quarter of 1999, the Company changed its segment reporting structure
to more closely match management's internal reporting of business operations.
Significant changes included moving the check solutions businesses in Canada and
the U.K. (previously in the North American and Europe segments, respectively)
into Payment Services, and moving the operations of Equifax Secure, which is
developing authentication and digital certificate services, from General
Corporate Expense to the North American segment. The
9
<PAGE>
1998 quarterly segment data has been restated to conform with the current year
presentation. Operating revenue and operating income by segment for the third
quarter and first nine months of 1999 and 1998 are as follows (in thousands):
<TABLE>
<CAPTION>
Third Quarter Nine Months
--------------------------------- -----------------------------------
Operating Revenue: 1999 1998 1999 1998
- ------------------ ------------- ------------- -------------- --------------
<S> <C> <C> <C> <C>
North American Information Services $189,253 $200,355 $ 578,080 $ 574,789
Payment Services 175,084 142,323 489,815 392,790
Equifax Europe 45,038 50,829 138,311 134,033
Equifax Latin America 32,581 29,498 95,022 63,133
Other 2,409 2,409 7,227 7,227
-------- -------- ---------- ----------
$444,365 $425,414 $1,308,455 $1,171,972
======== ======== ========== ==========
Operating Income (Loss):
- ------------------------
North American Information Services $ 71,721 $ 69,107 $ 209,096 $ 199,040
Payment Services 34,756 27,510 94,000 70,715
Equifax Europe 242 6,724 (2,735) 14,611
Equifax Latin America 7,447 6,046 16,681 14,578
Other 2,217 2,217 6,651 6,649
-------- -------- ---------- ----------
Operating Contribution 116,383 111,604 323,693 305,593
General Corporate Expense (4,214) (11,957) (25,834) (32,769)
-------- -------- ---------- ----------
$112,169 $ 99,647 $ 297,859 $ 272,824
======== ======== ========== ==========
</TABLE>
Total assets by segment at September 30, 1999 and December 31, 1998 (restated
for the changes in segment reporting discussed above) are as follows:
<TABLE>
<CAPTION>
September 30, December 31,
(in thousands) 1999 1998
- -------------- ---------------- ----------------
<S> <C> <C>
North American Information Services $ 551,329 $ 553,809
Payment Services 448,177 491,821
Equifax Europe 302,328 326,865
Equifax Latin America 264,525 341,834
Other 3,766 3,517
Corporate 142,309 110,949
---------- ----------
$1,712,434 $1,828,795
========== ==========
</TABLE>
The declines in total assets within the Payment Services and Equifax Latin
American segments were due primarily to those segments' operations in Brazil,
where the currency dropped in value by approximately 38% between periods. The
increase in General Corporate assets related primarily to an increase in cash
and cash equivalents.
8. EARNINGS PER SHARE (EPS):
The income amount used in the numerator of the Company's EPS calculations is the
same for both basic and diluted EPS. A reconciliation of the average
outstanding shares used in the denominator of the calculations is as follows:
10
<PAGE>
<TABLE>
<CAPTION>
Third Quarter Nine Months
--------------------------------- ---------------------------------
(in thousands) 1999 1998 1999 1998
- -------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Weighted average shares
Outstanding (basic) 137,268 141,794 138,167 141,621
Effect of dilutive securities:
Stock options 1,769 2,776 2,035 2,737
Performance share plan 266 293 266 293
------- ------- ------- -------
Weighted average shares
Outstanding (diluted) 139,303 144,863 140,468 144,651
======= ======= ======= =======
</TABLE>
9. RECENT ACCOUNTING PRONOUNCEMENT:
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 (SFAS 133), "Accounting for Derivative
Instruments and Hedging Activities". SFAS 133 establishes accounting and
reporting standards for derivative instruments and hedging activities, and is
effective (as amended by SFAS No. 137) on January 1, 2001 for the Company.
Based on its current level of derivative instruments and hedging activities, the
Company does not believe the adoption of SFAS 133 will have a significant impact
on its financial statements or reported earnings.
11
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Results of Operations - (third quarter and first nine months of 1999 compared to
the third quarter and first nine months of 1998)
Revenue for the third quarter and first nine months of 1999 increased 4.5% and
11.6% respectively over the prior year. Excluding the impact of the October 1998
sale of the CSC collections business and the June 1999 sale of three risk
management offices, third quarter and first nine month revenue increased 6.1%
and 12.6% respectively, with approximately 4.6 and 8.6 percentage points of the
respective periods' increases attributable to acquisitions. Operating income of
$112.2 million for the quarter and $297.9 million for the first nine months
increased 12.6% and 9.2% respectively over the prior year periods. These
increases resulted primarily from revenue improvements in the Payment Services
segment, cost containment initiatives throughout the Company, and acquisitions.
Net income increased 8.5% to $58.1 million in the third quarter and 3.5% to
$154.1 million in the first nine months, and diluted earnings per share
increased $0.05 (13.5%) in the third quarter and $0.07 (6.8%) year-to-date.
During the second quarter, the Company sold its 34% interest in Proceda S.A. in
Brazil and also sold three small, non-strategic U.S. risk management offices.
The resulting gain of $7.1 million ($2.9 million after tax, or $.02 per share)
has been included in "Other income, net" in the consolidated statements of
income. During the third quarter and first nine months of 1999, the Company
expensed approximately $7.1 million ($4.2 million after tax, or $0.030 per
share) and $22.3 million ($13.4 million after tax, or $.095 per share)
respectively in costs related to the Company's "year 2000 program". During the
third quarter and first nine months of 1998, the Company expensed approximately
$5.7 million ($3.4 million after tax, or $0.023 per share) and $14.3 million
($8.6 million after tax, or $.059 per share) respectively in costs related to
this effort. The Company expects the total impact of its year 2000 program will
be approximately $0.11 per share in 1999.
The following discussion analyzes operating results for the Company's reportable
segments, general corporate expense, and consolidated interest expense.
North American Information Services
- -----------------------------------
Revenue in North American Information Services, which includes U.S. Credit
Information and Marketing Services, U.S. Risk Management Services, Mortgage
Information Services, Canadian Operations, Knowledge Engineering, Consumer
Direct, and Equifax Secure declined 5.5% in the third quarter and increased 0.6%
in the first nine months. Excluding the impact of acquisitions and divestitures,
revenue declined 3.0% in the quarter due primarily to lower revenues in U.S.
Risk Management Services and U.S. Credit Information and Marketing Services.
This segment's year-to-date revenue, adjusted for acquisitions and divestitures,
increased 0.9% over the comparable period in 1998.
Within U.S. Credit Information and Marketing Services, revenue was down 0.5% in
the quarter and up 3.3% year-to-date. The quarterly decline resulted from lower
marketing services revenue, which was down 4.7% from the prior year, partially
offset by a slight increase in revenue from credit information services. The
decline in marketing services revenue was due to pricing pressures and
consolidation within the financial services industry, while the increase in
credit information revenue was due to acquisitions. Quarterly revenue within
credit information services benefited from increased demand from retail and
telecommunication/utility industry customers, but this growth was tempered by an
average price decline of about 4%, reduced demand from mortgage industry
customers resulting from the higher interest rate environment, and consolidation
within certain industry groups. For the first nine months, acquisitions
accounted for 1.3 percentage points of the revenue increase. The remaining
increase was due to higher credit information volumes associated with mortgage
refinancing activities during the first six months of 1999 and increased demand
from retail and telecommunication/utility industry customers. Average prices for
credit reports declined about 3% in the first nine
12
<PAGE>
months of 1999 and pricing pressures are expected to continue. While year-to-
date revenue from marketing services increased slightly over the prior year,
growth is expected to be tempered due to industry consolidations.
Exclusive of divestitures, revenue in U.S. Risk Management Services was down
12.3% in the quarter and 3.5% year-to-date due to lower revenue from the
accounts receivable outsourcing business. Mortgage Information Services revenue
was down $0.4 million in the quarter due to the higher interest rate
environment, while year-to-date revenue increased $4.8 million due to higher
volumes from increased market share.
Canadian revenues declined 3.2% in the quarter and 1.5% in the first nine
months. In local currency, excluding the impact of acquisitions, revenue
declined 4.9% in the quarter and 3.8% year-to-date due primarily to pricing
pressures and increased competition within the consumer information business.
Operating income for North American Information Services increased 3.8% in the
quarter and 5.1% year-to-date. The third quarter gain resulted from cost
control initiatives and lower incentive expense, primarily within U.S. Credit
and Marketing Services. The cost control initiatives included headcount
reductions and lower costs from service providers, and included a $3.5 million
rebate from a data processing services provider related to services for the
first nine months of 1999. The year-to-date gain was due primarily to the
revenue growth in U.S. Credit Information and Marketing Services as well as cost
control initiatives. Growth in both periods was tempered by increased
developmental expenses within Equifax Secure related to the development of
remote authentication and digital certificate services as well as increased
investment in Knowledge Engineering. Absent these investments, operating income
increased approximately 9% in the third quarter and 11% year-to-date.
Payment Services
- ----------------
Payment Services consists of Card Solutions, Check Solutions and Card Software.
In September 1998, Payment Services expanded its operations into Latin America
by acquiring a 59.3% interest in UNNISA, a card services business in Brazil.
After adjusting for the impact of this acquisition, Payment Services revenue was
up 16.6% in the third quarter and 15.6% in the first nine months, with 4.0 and
1.9 percentage points of these respective increases due to the June 1999 start
up of a U.K. card processing operation. U.S. Card Solutions revenue increased
18.9% in the quarter and 15.4% year-to-date due to growth in processing of both
cardholder and merchant transactions. Check Solutions revenue increased 17.0% in
the quarter and 12.5% year-to-date, due primarily to volume increases within
U.S. Check Solutions. Revenue from Card Software was down in the quarter but was
up for the nine-month period due to the timing of license sales between periods.
Operating income increased 26.3% in the quarter and 32.9% year-to-date due
primarily to the revenue growth within U.S. Card Solutions and U.S. Check
Solutions. The timing of Card Software license sales between years lowered
third quarter operating income, but contributed to the increase in operating
income in the first nine months.
Equifax Europe
- --------------
Equifax Europe consists of operations primarily in the United Kingdom and Spain.
During the second quarter 1998, the Company increased its ownership in the
operations in Spain and obtained the control necessary to consolidate those
operations. Excluding the impact of acquisitions, revenue declined 11.4% in the
quarter and 9.4% in the first nine months due primarily to declines in
commercial credit information, auto lien information services, and marketing
services. The decline in auto lien information services resulted from a slowdown
in vehicle sales and increased competition within that market.
This segment reported operating income of $.2 million in the third quarter and a
$2.7 million operating loss year-to-date compared to operating income of $6.7
million and $14.6 million in the respective prior year periods. The operating
income declines in 1999 resulted from the revenue decline in conjunction with a
higher expense base. Acquisitions had a minimal impact on 1999 results. The
third quarter results improved from the first and second quarters, and are a
significant improvement from the loss in the fourth quarter of 1998. The
Company expects
13
<PAGE>
continued improvement in this segment's expense base and operating results, with
higher operating income in the fourth quarter.
Equifax Latin America
- ---------------------
Equifax Latin America consists of consumer and commercial information companies
predominantly located in Brazil, Chile and Argentina. Equifax Latin America also
has a developing operation in Mexico, and has a majority interest in credit
information companies in Peru and El Salvador. This segment's third quarter and
first nine-month revenue increases over 1998 were due to the August 1998
acquisition of an 80% interest in SCI in Brazil. After adjusting to exclude the
results of this acquisition during its noncomparable period of ownership,
segment revenue declined 19.9% in the third quarter and 12.0% year-to-date. A
large part of these declines related to Brazil, as revenue increased 4.3% in
local currency, but declined 35% in U.S. dollars due to the unfavorable exchange
rate. Revenue in Chile and Argentina declined in both periods due to economic
slowdowns in those countries. Chile's revenue was also adversely impacted by an
unfavorable exchange rate.
This segment's operating income increased 23.2% in the third quarter and 14.4%
year-to-date, as income from the Brazilian acquisition was partially offset by
lower income from Argentina and Chile. In local currency, the overall
performance of the Brazilian operation has exceeded management's expectations,
and the Company continues to streamline and integrate the operations of this
recent acquisition.
Other
- -----
This segment's revenue and operating income remained comparable between periods.
Its operations consist solely of a subcontract expiring in 2002 related to HISI,
the Company's lottery subsidiary.
General Corporate Expense
- -------------------------
General corporate expense declined $7.7 million in the third quarter and $6.9
million year-to-date. These declines were due primarily to a third quarter 1999
adjustment made to the Company's accrual for performance share plans, which have
certain measurement criteria based on the Company's stock price.
Interest Expense
- ----------------
Interest expense increased $2.4 million in the quarter and $17.6 million year-
to-date due to the higher level of borrowing for acquisitions and share
repurchases.
FINANCIAL CONDITION
Net cash provided by operations for the first nine months of 1999 was $257.7
million, an increase of $51.3 million over the comparable prior year period.
Dividend payments and capital expenditures, exclusive of acquisitions, were met
with these internally generated funds.
Other significant outlays in the first nine months of 1999 included $165.6
million of treasury stock purchases (Note 4) and $12.9 million for acquisitions
(Note 6). These items were principally financed by $66.7 million in net proceeds
from debt (obtained principally from additional borrowings under the Company's
$750 million revolving credit facility) and excess cash from operations.
Capital expenditures for 1999 are currently estimated to be approximately $120
million, with $86.2 million spent in the first nine months. Additional
expenditures may occur as opportunities arise. At September 30, 1999,
approximately $145 million remained authorized under the Company's share
repurchase program and purchases have continued in the fourth quarter.
14
<PAGE>
The remaining 1999 capital expenditures, exclusive of acquisitions, should be
met with internally generated funds. At September 30, 1999, $428 million
remained available under the Company's $750 million revolving credit facility to
fund future capital requirements, including the possible purchase of the CSC
credit reporting businesses (Note 5). Management believes that the Company's
liquidity will remain strong in both the short-term and long-term, and that the
Company has sufficient debt capacity to finance all of these requirements, if
necessary.
YEAR 2000 INFORMATION
1. Background. The widespread use of computer software that relies on two
----------
digits, rather than four digits, to define the applicable year may cause
computers and computer-controlled systems to malfunction or incorrectly
process data as we approach and enter the year 2000. In view of the
potential adverse impact of these "year 2000 problems" on our business,
operations and financial condition, we have implemented a central function
to manage, validate and report on a continuing basis to the Company's
executive management and Board of Directors with regard to our "year 2000
program." Our year 2000 program process comprises five continuing
activities: (a) identification and assessment, (b) remediation planning,
(c) remediation, (d) testing, and (e) contingency planning for year 2000
problem failures.
2. The Company's Year 2000 Focus. We have focused our year 2000 program
-----------------------------
primarily in the following areas: (a) our information technology systems,
which include (i) internally developed business applications software, (ii)
software provided by vendors and (iii) the computer and peripheral hardware
used in our operations; (b) electronic data interchange systems; (c) non-
information technology systems (embedded technology) including office
business machines, and security, backup power and other building systems;
and (d) the flow of materials and non-information technology services from
our vendors.
3. Readiness and Plans. This section describes the status of our year 2000
-------------------
program activities:
(a) Information Technology Systems.
------------------------------
We have completed our year 2000 identification, assessment and
remediation planning activities for the application software and host
environments (operating systems software and hardware) of our critical
information technology systems, including our systems for North
American Information Services, Payment Services, Equifax Europe,
Equifax Latin America and our central corporate functions. Regarding
remediation and testing, the status is as follows:
(1) We have completed remediation and internal testing (internal
application testing with current and future dates) for all of the
critical information technology systems of our North American
Information Services businesses, except for a couple of specific
programs for processing public records data input, where we have
been waiting for specifications from third parties. We expect to
complete remediation and internal testing with respect to those
couple of programs during the fourth quarter, and in any case we
have appropriate contingency plans in place.
(2) We have completed remediation and internal testing for all of the
critical information technology systems of our Payment Services
businesses.
(3) We have completed remediation of our critical information
technology systems for Equifax Europe. We have completed all of
our internal testing except for a portion of the future date
testing of our off-line system that supports our customers' pre-
approved credit offers, which we plan to complete by November
1999.
(4) We have completed remediation and internal testing of our
critical information
15
<PAGE>
technology systems for Equifax Latin America.
(5) We have completed remediation and internal testing of our
critical financial, human resources and payroll systems.
In order to obtain further assurance of year 2000 readiness of our
critical information technology systems, we are conducting additional
layers of testing of those systems beyond internal testing, as we deem
appropriate under the circumstances. We continue customer testing
(future date application testing with the customer) and intend to
continue that throughout the remainder of the year, as we deem
appropriate. With regard to a substantial majority of our critical
information technology systems, we have either completed, or are in
the final stages of enterprise testing (internal end-to-end cross-
functional testing). We commenced enterprise testing in May 1999, and
will continue it during the fourth quarter as we deem appropriate.
Further, we are conducting selected external end-to-end testing with
targeted customers and plan to continue that during the fourth quarter
as we deem appropriate.
We have completed the identification, assessment, remediation
planning, remediation and testing activities with regard to the other
elements of our critical information technology systems (including our
local area networks and desktop computing environments).
We continue to address concurrently our year 2000 issues with respect
to our non-critical information technology systems, and believe their
level of readiness will be sufficient to avoid any material impact on
the Company's business, operations or financial condition.
The majority of our information technology systems for North American
Information Services and Equifax Europe are operated at data centers
managed by IBM Global Services. IBM continues to assist us in
finalizing year 2000 preparations for our data processing operating
environments in the IBM Global Services data centers.
(b) Electronic Data Interchange Systems.
-----------------------------------
We are working with others with whom we engage in electronic data
interchange (including vendors, customers and other data suppliers),
and with our network telecommunications service providers, to
identify, assess and test for potential year 2000 problem failures in
our electronic data interchange systems. As part of those efforts, we
continue our contacts with our data interchange vendors and critical
network telecommunications service providers to assess their state of
year 2000 readiness and determine the potential for year 2000 problem
failures resulting from their equipment, networks or application
systems. We continue testing with the majority of our data interchange
vendors, and we continue to monitor the carrier reporting and testing
information being published by industry organizations such as Network
Forum (U.S. local service providers) and ITU (International
Telecommunications Union). We continue to review readiness analyses
published by consulting organizations, such as Gartner and Forrester,
and consultant reviews in relevant industry publications, pertaining
to telecommunications service providers. We believe that this process
will be ongoing throughout 1999, as we develop additional information
regarding those systems. In cases where we determine that the risks
associated with particular service providers are not acceptable, we
will migrate to satisfactory available alternative delivery systems.
So far, we have migrated from products of two telecommunications
service providers.
We have completed the identification, assessment, remediation
planning, and remediation for Company owned hardware components of our
critical network telecommunications systems. We have completed
internal testing and conducted various customer testing of our
critical internal network. There have been no additional replacements
or upgrades required as a result of that testing. We will continue to
test as we deem appropriate throughout the remainder of the year to
16
<PAGE>
minimize any risks of interruption.
Overall, we believe that our electronic data interchange systems will
be year 2000 ready as necessary to avoid any material adverse impact
on the Company's business, operations or financial condition.
(c) Non-Information Technology Systems.
----------------------------------
We have completed a substantial majority of our ongoing
identification, assessment and remediation planning for the year 2000
problem failures that may occur in our non-information technology
systems resulting from embedded technologies, including office
business machines, and security, backup power and other building
systems. We have completed the substantial majority of our remediation
and testing of those systems and anticipate ongoing testing throughout
1999.
(d) Materials and Services.
----------------------
We have distributed surveys to our materials and non-information
technology services vendors that support our material operations
requesting disclosure of their year 2000 readiness status and their
plans for addressing year 2000 problems relating to those goods and
services and any applicable delivery systems. We have obtained
additional assurances (including in some instances audit and test
activities) from all but a couple of our critical materials vendors
that their goods, services and delivery systems will be appropriately
and timely year 2000 ready to meet our continuing needs. We are
working to try to ensure the continuing supply from those few vendors,
and are increasing our inventory levels to cover our production
requirements for a period of time that we believe should provide
sufficient time to recover from production or delivery difficulties,
or to secure alternate supply sources.
4. Costs to Address.
----------------
We estimate that the cost of our year 2000 program activities will be $58
million. Through September 30, 1999, we have incurred costs of approximately
$53 million related to those activities. Regarding our annual per share
charges, we expensed approximately one cent per share in 1996, two cents per
share in 1997, and ten cents per share in 1998 in connection with our year
2000 program activities, and we plan to expense approximately eleven cents
per share in 1999. In addition to costs and expenses of outside consultants,
programmers and professional advisors, and acquired hardware and software,
the above figures include direct costs associated with Company information
technology employees working on our year 2000 program and some of the
Company's non-information technology employees who are devoting significant
time to the year 2000 program.
5. Business Continuity and Contingency Planning.
--------------------------------------------
We continue the process of identifying the reasonably likely year 2000
problem failures that we could experience with the goal of revising, to the
extent practical, our existing business continuity and contingency plans to
address the internal and external issues specific to those problems. Thus
far, we have focused as planned on reviewing our critical business
processes. We believe we have identified the substantial majority of the
potential material problem failures with respect to those critical
processes, and we have documented strategies for mitigating the associated
risk and revised our existing business continuity plans to reflect those
strategies. We began testing and subsequent modification of our contingency
plans in July 1999 and will continue those activities during the fourth
quarter as we deem appropriate. The strategies and supporting plans, which
are intended to enable us to continue to operate,
17
<PAGE>
include performing certain processes manually; repairing or obtaining
replacement systems; changing suppliers; and reducing or suspending certain
non-critical aspects of our operations. However, we believe that, due to
the widespread nature of potential year 2000 problems and our dynamic
business growth, the contingency planning process must be ongoing as we
continue to monitor year 2000 developments and our internal and external
business environment.
6. Possible Consequences of Year 2000 Problems.
-------------------------------------------
We believe that we have put in place the processes and are devoting the
resources necessary to achieve a level of readiness to meet our year 2000
challenges in a timely and appropriate manner. However, there can be no
assurance that our internal systems or the systems of others on which we
rely will be year 2000 ready in a timely and appropriate manner or that our
contingency plans or the contingency plans of others on which we rely will
mitigate the effects of year 2000 problem failures. Currently, we believe
the most reasonably likely worst case scenario would be a sustained,
concurrent failure of multiple critical systems (internal and external) that
support our operations. While we do not expect that scenario to occur, that
scenario if it occurs could, even despite the successful execution of our
business continuity and contingency plans, result in the reduction or
suspension of a material portion of our operations and accordingly have a
material adverse effect on our business and financial condition.
The preceding "Year 2000 Information" discussion contains various forward-
looking statements that represent our beliefs or expectations regarding
future events. When used in the "Year 2000 Information" discussion, the
words "believes," "expects," "estimates," "plans," "goals" and similar
expressions are intended to identify forward-looking statements. Forward-
looking statements include, without limitation, our expectations as to when
we will complete the identification and assessment, remediation planning,
remediation and testing activities of our year 2000 program as well as our
year 2000 contingency planning; our estimated cost of achieving year 2000
readiness; and our belief that our internal systems and equipment will be
year 2000 ready in a timely and appropriate manner. All forward-looking
statements involve a number of risks and uncertainties that could cause the
actual results to differ materially from the projected results. Factors that
may cause those differences include availability of information technology
resources; customer demand for our products and services; continued
availability of materials, services and data from our suppliers; the ability
to identify and remediate all date sensitive lines of computer code and to
replace embedded computer chips in affected systems and equipment; the
failure of others to timely achieve appropriate year 2000 readiness; and the
actions or inaction of governmental agencies and others with respect to year
2000 problems.
FORWARD-LOOKING INFORMATION
Statements in this report that relate to Equifax's future plans, objectives,
expectations, performance, events and the like are "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995 and
the Securities Exchange Act of 1934. Future events, risks and uncertainties,
individually or in the aggregate, could cause actual results to differ
materially from those expressed or implied in these statements. Those factors
could include changes in worldwide and U.S. economic conditions that materially
impact consumer spending and consumer debt, changes in demand for the Company's
products and services, risks associated with the integration of acquisitions and
other investments, and other factors discussed in the "Forward-looking
Information" section in the management's discussion and analysis included at
Part II, Item 7 in the Company's annual report on Form 10-K for the year ended
December 31, 1998, and in the "Year 2000 Information" section in the
management's discussion and analysis included at Part I, Item 2 in this report.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company does not have material market risk exposure from market risk
sensitive instruments.
18
<PAGE>
PART II. OTHER INFORMATION
-----------------------------
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
A list of exhibits included as part of this report is set forth in the
Exhibit Index appearing elsewhere in this report, and is incorporated
by reference.
(b) Reports on Form 8-K
Registrant did not file any reports on Form 8-K during the quarter for
which this report is filed.
EXHIBIT INDEX
-------------
Exhibit Number Description of Exhibit
-------------- ----------------------
27 . Financial Data Schedule, submitted to the Commission in
electronic format
19
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned duly authorized officers.
EQUIFAX INC.
(Registrant)
Date: November 15, 1999 /s/Thomas F. Chapman
------------------------------------
Thomas F. Chapman
Chairman and Chief Executive Officer
Date: November 15, 1999 /s/David A. Post
------------------------------------
David A. Post
Corporate Vice President and Chief
Financial Officer
20
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM EQUIFAX INC.
FINANCIAL STATEMENTS AS OF AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
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<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 137,109
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<RECEIVABLES> 302,477
<ALLOWANCES> 13,770
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<CURRENT-ASSETS> 538,697
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<COMMON> 217,760
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