<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 June 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
------
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.)
1600 Peachtree Street, N.W. Atlanta, Georgia
P.O. Box 4081, Atlanta, Georgia 30302
----------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
404-885-8000
----------------------------------------------------
(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 June 30, 1999
----- ----------------------------
Common Stock, $1.25 Par Value 143,754,330
<PAGE>
INDEX
Page No.
--------
Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets --
June 30, 1999 and December 31, 1998 2 - 3
Consolidated Statements of Income --
Three Months Ended June 30, 1999 and 1998 4
Consolidated Statements of Income --
Six Months Ended June 30, 1999 and 1998 5
Consolidated Statement of Shareholders' Equity --
Six Months Ended June 30, 1999 6
Consolidated Statements of Cash Flows --
Six Months Ended June 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 4. Submission of Matters to a Vote of Security Holders 19
Item 6. Exhibits and Reports on Form 8-K 19
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
JUNE 30, DECEMBER 31,
(In thousands) 1999 1998
- -----------------------------------------------------------------------
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 152,343 $ 90,617
Trade accounts receivable, net 282,179 298,201
Other receivables 49,593 54,904
Deferred income tax assets 24,823 26,223
Other current assets 53,384 50,420
---------- ----------
Total current assets 562,322 520,365
---------- ----------
PROPERTY AND EQUIPMENT:
Land, buildings and improvements 29,766 30,963
Data processing equipment and furniture 244,937 239,391
---------- ----------
274,703 270,354
Less accumulated depreciation 160,811 151,016
---------- ----------
113,892 119,338
---------- ----------
GOODWILL 610,387 719,662
---------- ----------
PURCHASED DATA FILES 162,862 173,473
---------- ----------
OTHER ASSETS 288,241 295,957
---------- ----------
$1,737,704 $1,828,795
========== ==========
The notes on pages 8 through 11 are an integral part of these consolidated
balance sheets.
2
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
JUNE 30, DECEMBER 31,
(In thousands, except par value) 1999 1998
- ---------------------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term debt and current maturities of long-term debt $ 41,118 $ 47,387
Accounts payable 132,273 107,346
Accrued salaries and bonuses 28,508 37,973
Income taxes payable 3,240 9,518
Other current liabilities 194,571 216,955
----------- ----------
Total current liabilities 399,710 419,179
----------- ----------
LONG-TERM DEBT, LESS CURRENT MATURITIES 941,589 869,486
----------- ----------
LONG-TERM DEFERRED REVENUE 27,445 32,465
----------- ----------
DEFERRED INCOME TAX LIABILITIES 53,167 50,132
----------- ----------
OTHER LONG-TERM LIABILITIES 91,060 91,067
----------- ----------
COMMITMENTS AND CONTINGENCIES (Note 5)
SHAREHOLDERS' EQUITY:
Common stock, $1.25 par value; shares authorized -
300,000; issued - 174,112 in 1999 and 173,722 in 1998;
outstanding - 138,513 in 1999 and 140,042 in 1998 217,639 217,153
Preferred stock, $0.01 par value; shares authorized -
10,000; issued and outstanding - none in 1999 or 1998 -- --
Paid-in capital 293,188 286,511
Retained earnings 632,916 562,911
Accumulated other comprehensive loss (Note 4) (160,495) (35,063)
Treasury stock, at cost, 30,357 shares in 1999
and 27,698 shares in 1998 (700,096) (606,092)
Stock held by employee benefits trusts, at cost,
5,929 shares in 1999 and 5,983 shares in 1998 (58,419) (58,954)
----------- ----------
Total shareholders' equity 224,733 366,466
----------- ----------
$1,737,704 $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
JUNE 30,
(In thousands, except per share amounts) 1999 1998
- --------------------------------------------------------------------------------------------
<S> <C> <C>
Operating revenue $442,586 $393,464
-------- --------
Costs of services 256,729 223,453
Selling, general and administrative expenses 88,977 77,828
-------- --------
Total operating expenses 345,706 301,281
-------- --------
Operating income 96,880 92,183
Other income, net (Note 6) 8,540 649
Interest expense (15,291) (8,222)
-------- --------
Income before income taxes 90,129 84,610
Provision for income taxes 38,023 33,978
-------- --------
Net income $ 52,106 $ 50,632
======== ========
Per common share (basic):
Net income $ 0.38 $ 0.36
======== ========
Shares used in computing basic earnings per share 138,107 141,365
======== ========
Per common share (diluted):
Net income $ 0.37 $ 0.35
======== ========
Shares used in computing diluted earnings per share 140,528 144,430
======== ========
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)
SIX MONTHS ENDED
JUNE 30,
(In thousands, except per share amounts) 1999 1998
- --------------------------------------------------------------------------------------------
<S> <C> <C>
Operating revenue $864,090 $746,558
-------- --------
Costs of services 505,488 425,423
Selling, general and administrative expenses 172,912 147,958
-------- --------
Total operating expenses 678,400 573,381
-------- --------
Operating income 185,690 173,177
Other income, net (Note 6) 9,022 1,370
Interest expense (30,426) (15,254)
-------- --------
Income before income taxes 164,286 159,293
Provision for income taxes 68,279 63,926
-------- --------
Net income $ 96,007 $ 95,367
======== ========
Per common share (basic):
Net income $ 0.69 $ 0.67
======== ========
Shares used in computing basic earnings per share 138,617 141,534
======== ========
Per common share (diluted):
Net income $ 0.68 $ 0.66
======== ========
Shares used in computing diluted earnings per share 141,086 144,545
======== ========
Dividends per common share $ 0.1800 $ 0.1750
======== ========
</TABLE>
The notes on pages 8 through 11 are an integral part of these
consolidated statements.
5
<PAGE>
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (UNAUDITED)
SIX MONTHS ENDED
(In thousands) JUNE 30, 1999
- -------------------------------------------------------------------------
COMMON STOCK:
Balance at beginning of period $ 217,153
Shares issued under stock plans 486
---------
Balance at end of period $ 217,639
=========
PAID-IN CAPITAL:
Balance at beginning of period $ 286,511
Shares issued under stock plans 5,665
Other 1,012
---------
Balance at end of period $ 293,188
=========
RETAINED EARNINGS:
Balance at beginning of period $ 562,911
Net income 96,007
Cash dividends paid (26,002)
---------
Balance at end of period $ 632,916
=========
ACCUMULATED OTHER COMPREHENSIVE LOSS (Note 4):
Balance at beginning of period $ (35,063)
Adjustment during period (125,432)
---------
Balance at end of period $(160,495)
=========
TREASURY STOCK:
Balance at beginning of period $(606,092)
Cost of shares repurchased (94,004)
---------
Balance at end of period $(700,096)
=========
STOCK HELD BY EMPLOYEE BENEFITS TRUSTS:
Balance at beginning of period $ (58,954)
Cost of shares reissued under stock plans 535
---------
Balance at end of period $ (58,419)
=========
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) SIX MONTHS ENDED
JUNE 30,
(In thousands) 1999 1998
- -------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 96,007 $ 95,367
Adjustments to reconcile net income to net cash
cash provided by operating activities:
Depreciation and amortization 59,995 45,501
Gain from sale of businesses (7,095) --
Changes in assets and liabilities:
Trade and other receivables, net 13,430 (28,730)
Current liabilities, excluding debt (5,074) 29,542
Other current assets 157 (7,920)
Deferred income taxes 3,848 6,990
Other long-term liabilities, excluding debt (632) (13,565)
Other assets (2,181) (13,332)
-------- ---------
Net cash provided by operating activities 158,455 113,853
-------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment (17,917) (23,773)
Additions to other assets, net (39,991) (30,101)
Acquisitions, net of cash acquired (10,934) (88,179)
Proceeds from sale of businesses 25,957 --
Investments in unconsolidated affiliates -- (2,200)
-------- ---------
Net cash used in investing activities (42,885) (144,253)
-------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net short-term borrowings (3,434) (7,590)
Net additions to long-term debt 70,996 208,907
Dividends paid (26,002) (25,891)
Treasury stock purchases (94,004) (63,262)
Proceeds from exercise of stock options 5,140 6,558
Other 1,441 1,096
-------- ---------
Net cash (used in) provided by financing activities (45,863) 119,818
-------- ---------
Effect of foreign currency exchange rates on cash (7,981) 28
-------- ---------
Net cash provided 61,726 89,446
Cash and cash equivalents, beginning of period 90,617 52,251
-------- ---------
Cash and cash equivalents, end of period $152,343 $ 141,697
======== =========
</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)
June 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 June 30, 1999 and the results of operations for
the three and six months ended June 30, 1999 and 1998 and the cash flows for the
six months ended June 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
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 six months of 1999, the Company repurchased
2,659,000 of its common shares through open market transactions at an aggregate
cost of $94,004,000. As of June 30, 1999, approximately $217 million remained
authorized for future share repurchases.
Comprehensive Income. Effective with the first quarter 1998, the Company
adopted FASB Statement No. 130, "Reporting Comprehensive Income". For the six
month periods ending June 30, 1999 and 1998, comprehensive income (loss) is as
follows:
Six Months Ended
June 30
(in thousands) 1999 1998
- -------------- --------- -------
Net income $ 96,007 $95,367
Change in cumulative foreign
currency translation adjustment (125,432) (4,804)
--------- -------
Comprehensive income (loss) $ (29,425) $90,563
========= =======
8
<PAGE>
Accumulated other comprehensive loss at June 30, 1999 and December 31, 1998
consists of the following components:
(in thousands) June 30, 1999 December 31, 1998
- -------------- ------------- -----------------
Cumulative foreign currency
translation adjustment $(154,429) $(28,997)
Adjustment for minimum liability
under supplemental retirement plan (6,066) (6,066)
--------- --------
$(160,495) $(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 six months of 1999, the Company acquired the credit files of
eight affiliates located in the United States. They were accounted for as
purchases, had a total purchase price of $13.0 million, and were acquired for
cash. These acquisitions resulted in $3.8 million of goodwill and $8.4 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, 1998, the Company adopted FASB Statement No.
131, "Disclosures About Segments of an Enterprise and Related Information". In
the first quarter, 1999, the Company changed its segment reporting structure to
more closely match management's internal reporting of business operations.
Significant changes included moving the check solutions businesses in Canada and
the U.K. (previously in the North American and Europe segments, respectively)
into Payment Services, and moving the operations of Equifax Secure, which is
developing authentication and digital certificate services, from General
Corporate Expense to the North American segment. The 1998 quarterly segment data
has been restated to conform with the current year presentation. Operating
revenue and operating income by segment for the second quarter and first six
months of 1999 and 1998 are as follows (in thousands):
9
<PAGE>
<TABLE>
<CAPTION>
Second Quarter Six Months
--------------------- ----------------------
Operating Revenue: 1999 1998 1999 1998
- ------------------ -------- -------- -------- --------
<S> <C> <C> <C> <C>
North American Information Services $196,835 $194,127 $388,827 $374,434
Payment Services 163,602 132,504 314,731 250,467
Equifax Europe 47,220 46,458 93,273 83,204
Equifax Latin America 32,520 17,966 62,441 33,635
Other 2,409 2,409 4,818 4,818
-------- -------- -------- --------
$442,586 $393,464 $864,090 $746,558
======== ======== ======== ========
Operating Income (Loss):
- ------------------------
North American Information Services $ 71,696 $ 68,069 $137,375 $129,933
Payment Services 30,607 23,970 59,244 43,205
Equifax Europe (1,289) 4,732 (2,977) 7,887
Equifax Latin America 5,047 4,346 9,234 8,532
Other 2,217 2,217 4,434 4,432
-------- -------- -------- --------
Operating Contribution 108,278 103,334 207,310 193,989
General Corporate Expense (11,398) (11,151) (21,620) (20,812)
-------- -------- -------- --------
$ 96,880 $ 92,183 $185,690 $173,177
======== ======== ======== ========
</TABLE>
Total assets by segment at June 30, 1999 and December 31, 1998 (restated for the
changes in segment reporting discussed above) are as follows:
<TABLE>
<CAPTION>
June 30, December 31,
(in thousands) 1999 1998
- -------------- ---------- ------------
<S> <C> <C>
North American Information Services $ 558,349 $ 553,809
Payment Services 458,981 491,821
Equifax Europe 300,979 326,865
Equifax Latin America 275,581 341,834
Other 3,940 3,517
Corporate 139,874 110,949
---------- ----------
$1,737,704 $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 31% between periods. The
decline in assets within Equifax Europe related primarily to the currency
exchange rate in the U.K., which declined about 5% 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>
Second Quarter Six Months
-------------------- --------------------
(in thousands) 1999 1998 1999 1998
- -------------- ------- ------- ------- -------
<S> <C> <C> <C> <C>
Weighted average shares
Outstanding (basic) 138,107 141,365 138,617 141,534
Effect of dilutive securities:
Stock options 2,141 2,772 2,189 2,718
Performance share plan 280 293 280 293
------- ------- ------- -------
Weighted average shares
Outstanding (diluted) 140,528 144,430 141,086 144,545
======= ======= ======= =======
</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 - (second quarter and first six months of 1999 compared to
the second quarter and first six months of 1998)
Revenue for the second quarter and first six months of 1999 increased 12.5% and
15.7% respectively over the prior year. Excluding the October 1998 sale of
the CSC collections business, second quarter and first six month revenue
increased 13.6% and 16.3% respectively, with 9.9 and 10.9 percentage points of
the respective periods' increases attributable to acquisitions. Operating income
of $96.9 million for the quarter and $185.7 million for the first six months
increased 5.1% and 7.2% respectively over the prior year periods. These
increases resulted primarily from revenue improvements in the Payment Services
segment and cost containment initiatives throughout the Company.
Net income increased 2.9% to $52.1 million in the second quarter and .7% to
$96.0 million in the first six months, and diluted earnings per share increased
$0.02 in both periods. 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 second quarter and first six
months of 1999, the Company expensed approximately $8.3 million ($5.0 million
after tax, or $0.035 per share) and $15.2 million ($9.2 million after tax, or
$.065 per share) respectively in costs related to the Company's "year 2000
program". During the second quarter and first six months of 1998, the Company
expensed approximately $5.6 million ($3.4 million after tax, or $0.023 per
share) and $8.7 million ($5.2 million after tax, or $.036 per share)
respectively in costs related to this effort. The Company expects the total
impact of its year 2000 program will be approximately $0.10 per share in 1999.
The following discussion analyzes operating results for the Company's reportable
segments and consolidated interest expense.
North American Information Services
- -----------------------------------
Revenue in North American Information Services, which includes U.S. Credit
Information and Marketing Services, U.S. Risk Management Services, Mortgage
Information Services, Canadian Operations, Knowledge Engineering, Consumer
Direct, and Equifax Secure increased 1.4% in the second quarter and 3.8% in the
first six months. Excluding the CSC collections business, which was sold in the
third quarter of 1998, revenue increased 3.4% in the quarter and 4.9% year-to-
date with approximately two percentage points of the respective increases
attributable to acquisitions. U.S. Credit Information and Marketing Services
revenue was up 3.8% in the quarter and 5.4% year-to-date. Acquisitions
accounted for about 1.5 percentage points of the increase in both periods and
the remainder was due primarily to increased demand from retail and
telecommunication/utility industry customers and higher volumes associated with
mortgage refinancing activities due to the favorable interest rate environment
during the first six months of 1999. While revenue from marketing services was
up 3.2% in the first six months, second quarter revenue was down slightly due to
recent mergers and acquisitions within the banking industry. Average prices for
credit reports declined slightly in both periods and modest pricing pressures
are expected to continue.
Exclusive of the CSC collections business divestiture, revenue in U.S. Risk
Management Services was up slightly in the first six months of 1999 but was down
4.2% in the second quarter due to a major customer electing to take its
collections business in-house. Mortgage Information Services revenue increased
$2.9 million in the quarter and $5.2 million year-to-date due to higher volumes
from increased market share.
Canadian revenues declined 1.8% in the quarter and .7% in the first six months.
In local currency, second quarter revenues were level with 1998 while year-to-
date revenue increased 3.0%. Exclusive of acquisitions, Canadian revenue
declined 5.8% in the quarter and 3.2% year-to-date due to pricing pressures and
increased competition within the consumer information business.
12
<PAGE>
Operating income for North American Information Services increased 5.3% in the
quarter and 5.7% year-to-date due primarily to the revenue growth in U.S. Credit
Information and Marketing Services as well as cost control initiatives. The
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 11% in both
periods.
Payment Services
- ----------------
Payment Services consists of Card Solutions, Check Solutions and Card Software.
In September 1998, Payment Services expanded its operations into Latin America
by acquiring a 59.3% interest in UNNISA, a card services business in Brazil.
Exclusive of this acquisition, Payment Services revenue was up 13.2% in the
second quarter and 15.0% in the first six months, with U.S. Card Solutions
revenue increasing 14.8% in the quarter and 13.6% year-to-date due to growth in
processing of both cardholder and merchant transactions. In April 1999, Card
Services for Credit Unions (CSCU) extended its card processing contract with
Card Solutions through 2004. Check Solutions revenue increased 11.2% in the
quarter and 10.1% 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 six month period due to the timing of license sales between periods.
Operating income increased 27.7% in the quarter and 37.1% year-to-date due
primarily to the revenue growth within U.S. Card Solutions and U.S. Check
Solutions. Higher license sales from Card Software also contributed to the
increase in operating income in the first six months. The Brazilian operation
had a minimal impact on this segment's operating income in both periods.
Equifax Europe
- --------------
Equifax Europe consists of operations primarily in the United Kingdom and Spain.
During the second quarter 1998, the Company increased its ownership in the
operations in Spain and obtained the control necessary to consolidate these
operations. While the slowdown in the U.K. economy continued to affect core
revenue growth, Equifax Europe's revenue increased 1.6% in the second quarter
and 12.1% year-to-date over the prior year due to acquisitions. Exclusive of
acquisitions, this segment's revenue was down 10.0% in the quarter and 8.2% in
the first six months, due primarily to declines in commercial credit information
and auto lien information services. The decline in auto lien information
services resulted from a slowdown in vehicle sales and increased competition
within this market.
This segment reported operating losses of $1.3 million in the second quarter and
$3.0 million year-to-date compared to operating income of $4.7 million and $7.9
million in the respective prior year periods. The operating losses in 1999
resulted from the revenue decline in conjunction with a higher expense base.
Acquisitions had a minimal impact on 1999 results. The second quarter loss
improved from the first quarter and is a significant improvement from the loss
in the fourth quarter of 1998. The Company expects continued improvement in
this segment's expense base and operating results throughout 1999, with a return
to profitability in the third quarter.
Equifax Latin America
- ---------------------
Equifax Latin America consists of consumer and commercial information companies
predominantly located in Brazil, Chile and Argentina. Equifax Latin America also
has a developing operation in Mexico, and has a majority interest in credit
information companies in Peru and El Salvador. This segment's second quarter
and first six month revenue increases over 1998 were due to the August 1998
acquisition of an 80% interest in SCI in Brazil. Exclusive of this acquisition,
segment revenue declined 6.1% in the second quarter and 1.6% year-to-date.
Revenue in Argentina was adversely impacted by the Brazilian economy and was
down in the quarter and first six months. Unfavorable exchange rates adversely
impacted revenue in Chile; however, in local currency revenue increased 3.2% in
the second quarter and 4.1% for the first six months, exclusive of acquisitions.
13
<PAGE>
This segment's operating income increased 16.1% in the second quarter and 8.2%
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.
Interest Expense
- ----------------
Interest expense increased $7.1 million in the quarter and $15.2 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 six months of 1999 was $158.5
million, an increase of $44.6 million over the comparable prior year period, and
working capital increased $61.4 million between periods. Normal capital
expenditures and dividend payments were met with these internally generated
funds.
Other significant outlays in the first six months of 1999 included $94.0 million
of treasury stock purchases (Note 4) and $10.9 million for acquisitions (Note
6). These items were principally financed by $67.6 million in net proceeds from
debt (obtained primarily 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 $57.9 million spent in the first six months. Additional
expenditures are possible as opportunities arise. At June 30, 1999,
approximately $217 million remained authorized under the Company's share
repurchase program and purchases have continued in the third quarter.
The remaining 1999 capital expenditures, exclusive of acquisitions, should be
met with internally generated funds. At June 30, 1999, $430 million remained
available under the Company's $750 million revolving credit facility to fund
future capital requirements, including the possible purchase of the CSC credit
reporting businesses (Note 5). Management feels that the Company's liquidity
will remain strong in both the short-term and long-term, and that the Company
has sufficient debt capacity to finance all of these requirements, if necessary.
YEAR 2000 INFORMATION
1. Background. The widespread use of computer software that relies on two
----------
digits, rather than four digits, to define the applicable year may cause
computers and computer-controlled systems to malfunction or incorrectly
process data as we approach and enter the year 2000. In view of the
potential adverse impact of these "year 2000 problems" on our business,
operations and financial condition, we have implemented a central function
to manage, validate and report on a continuing basis to the Company's
executive management and Board of Directors with regard to our "year 2000
program." Our year 2000 program process comprises five continuing
activities: (a) identification and assessment, (b) remediation planning,
(c) remediation, (d) testing, and (e) contingency planning for year 2000
problem failures.
2. The Company's Year 2000 Focus. We have focused our year 2000 program
-----------------------------
primarily in the following areas: (a) our information technology systems,
which include (i) internally developed business applications software, (ii)
software provided by vendors and (iii) the computer and peripheral hardware
14
<PAGE>
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) internal testing
of our Canadian off-line consumer credit system (supports our
customers' offers of pre-approved credit and review of their
existing credit accounts) and our Canadian commercial credit
reporting system, both of which we have determined will require
additional testing scheduled for completion during the third
quarter of 1999, and (b) remediation and internal testing of a
small minority of U.S. customer-specific programs for processing
data input, where we are dependent on specifications yet to be
provided by those customers. Regarding those data input
programs, we expect that small minority of customers to provide
the specifications in a timely manner to allow us to complete
those remaining programs no later than the fourth quarter. If a
customer does not provide its specifications, we have contingency
plans that will allow us to execute those programs using standard
industry accepted specifications.
(2) We have completed remediation and internal testing for all of the
critical information technology systems of our Payment Services
businesses, except for, (a) in connection with our Brazilian card
operations, the completion of the process of converting the
remaining minority of our Brazilian card processing accounts to
our two new systems (including our proprietary card processing
system), both written to be year 2000 ready, and (b) internal
testing for our U.S. check services business, which we plan to
complete by August 1999. The extension of internal testing for
our U.S. check services business is the result of non-year 2000
related system modifications requested by a key customer.
(3) We have completed remediation of our critical information
technology systems for Equifax Europe. We have completed
substantially all internal testing with current dates; we
currently are conducting future date testing in parallel with
enterprise testing (internal end-to-end cross-functional
testing), and plan to complete that testing by October 1999.
(4) We have completed remediation of our critical information
technology systems for Equifax Latin America, and we have
completed internal testing, except for our Brazilian information
reporting business. With respect to our Brazilian information
reporting business, we plan to complete internal testing by
September 1999.
(5) We have completed remediation and internal testing of our
central, corporate financial, human resources and payroll systems
in the U.S. With respect to our critical non-U.S. financial,
human resources and payroll systems, we have upgraded or migrated
them to third party systems written to be year 2000 ready. We
have completed internal testing, except for our Spain financial
package, and the financial and payroll packages for our
15
<PAGE>
Brazilian information reporting business, both of which we plan
to complete during third quarter 1999.
In order to obtain further assurance of year 2000 readiness of our
critical information technology systems, we are conducting additional
layers of testing of those systems beyond internal testing, as we deem
appropriate under the circumstances. We continue customer testing
(future date application testing with the customer) with many of our
more significant customers, and intend to continue that throughout the
year as we deem appropriate. With regard to a substantial majority of
our critical information technology systems, we have completed test
plans for enterprise testing (internal end-to-end cross-functional
testing). We commenced enterprise testing in May 1999, and will
continue it during the third quarter as we deem appropriate. Further,
we plan to conduct selected external end-to-end testing with targeted
customers during the third quarter and into the fourth quarter.
We have completed the identification, assessment and remediation
planning activities with regard to the other elements of our critical
information technology systems (including our local area networks and
desktop computing environments). We plan to complete the remediation
and testing activities associated with those elements by August 31,
1999.
We concurrently are addressing year 2000 issues with respect to our
non-critical information technology systems, and believe their level
of readiness will be sufficient to avoid any material impact on the
Company's business, operations or financial condition.
The majority of our information technology systems for North American
Information Services and Equifax Europe are operated at data centers
managed by IBM Global Services. IBM continues to assist us in
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
believe that we will be able to timely migrate to satisfactory
alternative delivery systems. We have migrated from two such carriers
so far.
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 of our critical internal network, and there were 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 minimize any risks of interruption.
16
<PAGE>
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 the majority of our critical 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 of goods and services from the remaining
critical vendors. If any vendor is unable or unwilling to provide
appropriate assurances, we believe that we will be able to use
alternative vendors or otherwise modify our services in a manner that
will avoid any material impact to the Company. We will continue these
efforts throughout 1999 as we deem appropriate.
4. Costs to Address.
----------------
We estimate that the cost of our year 2000 program activities will be $56
million. Through June 30, 1999, we have incurred costs of approximately $
46 million related to those activities. Regarding our annual per share
charges, we expensed approximately one cent per share in 1996, two cents
per share in 1997, and ten cents per share in 1998 in connection with our
year 2000 program activities, and we plan to expense approximately ten
cents per share in 1999. In addition to costs and expenses of outside
consultants, programmers and professional advisors, and acquired hardware
and software, the above figures include direct costs associated with
Company information technology employees working on our year 2000 program
and some of the Company's non-information technology employees who are
devoting significant time to the year 2000 program.
5. Business Continuity and Contingency Planning.
--------------------------------------------
We continue the process of identifying the reasonably likely year 2000
problem failures that we could experience with the goal of revising, to the
extent practical, our existing business continuity and contingency plans to
address the internal and external issues specific to those problems. Thus
far, we have focused as planned on reviewing our critical business
processes. We believe we have identified the substantial majority of the
potential material problem failures with respect to those critical
processes, and we have documented strategies for mitigating the associated
risk 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 into the
fourth quarter as we deem appropriate. The strategies and supporting
plans, which are intended to enable us to continue to operate, include
performing certain processes manually; repairing or obtaining replacement
systems; changing suppliers; and reducing or suspending certain non-
critical aspects of our operations. However, we believe that, due to the
widespread nature of potential year 2000 problems and our dynamic business
growth, the
17
<PAGE>
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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) On May 6, 1999, the Company held its regular annual meeting of
Shareholders.
(b) Below is a brief description of each matter voted upon at the annual
meeting, each more fully described in the Company's definitive Proxy
Statement, dated March 25, 1999:
(i) Election of four directors to serve terms of three years: Thomas F.
Chapman (123,428,387 votes "for" and 1,132,851 votes withheld); Robert
P. Forrestal (123,190,823 votes "for" and 1,370,415 votes withheld);
D. Raymond Riddle (123,554,555 votes "for" and 1,006,683 votes
withheld); Betty L. Siegel, Ph.D. (123,169,225 votes "for" and
1,392,013 votes withheld). The names of each other Director whose term
of office as a Director continued after this meeting are as follows:
Lee A. Ault, III, John L. Clendenin, A. William Dahlberg, L. Phillip
Humann, Larry L. Prince, C. B. Rogers, Jr., Louis W. Sullivan, M.D.
and Jacquelyn M. Ward.
(ii) Approval of Appointment of Arthur Andersen LLP as independent public
accountants of the Company for the year 1999 (123,196,964 votes "for";
410,618 votes "against"; and 953,656 abstentions).
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.
19
<PAGE>
EXHIBIT INDEX
- -------------
Exhibit Number Description of Exhibit
-------------- ----------------------
27 . Financial Data Schedule, submitted to the Commission in
electronic format
20
<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: August 16, 1999 /s/ Thomas F. Chapman
---------------------
Thomas F. Chapman
Chairman and Chief Executive Officer
Date: August 16, 1999 /s/ David A. Post
-----------------
David A. Post
Corporate Vice President and
Chief Financial Officer
21
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<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM EQUIFAX INC.
FINANCIAL STATEMENTS AS OF AND FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
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<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
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<RECEIVABLES> 294,535
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<PP&E> 274,703
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<CURRENT-LIABILITIES> 399,710
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<COMMON> 217,639
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<OTHER-EXPENSES> 172,912
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