10-Q
United States
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-Q
(Mark One)
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2005
OR
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o |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number 1-15967
The Dun & Bradstreet Corporation
(Exact name of registrant as specified in its charter)
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Delaware
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22-3725387 |
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(State of incorporation)
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(I.R.S. Employer Identification No.) |
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103 JFK Parkway, Short Hills, NJ
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07078 |
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(Address of principal executive offices)
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(Zip Code) |
Registrants telephone number, including area code: (973) 921-5500
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 þ No o
Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule
12b-2 of the Exchange Act). Yes þ No o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act). Yes o No þ
Indicate the number of shares outstanding of each of the issuers classes of common stock, as
of the latest practicable date:
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Shares Outstanding |
Title of Class |
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at September 30, 2005 |
Common Stock,
par value $0.01 per share
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66,388,518 |
THE DUN & BRADSTREET CORPORATION
INDEX TO FORM 10-Q
2
PART
I. FINANCIAL INFORMATION
Item 1. Financial Statements.
The Dun & Bradstreet Corporation
Consolidated Statements of Operations (Unaudited)
Amounts in millions, except share and per share data
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Three Months Ended |
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Nine Months Ended |
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September 30, |
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September 30, |
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2005 |
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2004 |
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2005 |
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2004 |
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Revenue |
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$ |
341.6 |
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$ |
333.2 |
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$ |
1,034.6 |
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$ |
1,026.5 |
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Operating Expenses |
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105.7 |
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98.4 |
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307.8 |
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306.9 |
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Selling and Administrative Expenses |
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143.4 |
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148.1 |
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451.8 |
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461.4 |
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Depreciation and Amortization |
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8.6 |
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11.1 |
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26.0 |
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34.3 |
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Restructuring Charge |
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4.7 |
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2.7 |
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21.6 |
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20.9 |
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Operating Costs |
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262.4 |
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260.3 |
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807.2 |
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823.5 |
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Operating Income |
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79.2 |
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72.9 |
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227.4 |
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203.0 |
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Interest Income |
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2.2 |
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2.1 |
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8.1 |
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6.0 |
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Interest Expense |
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(5.4 |
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(4.9 |
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(15.7 |
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(14.5 |
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Minority Interest |
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(0.2 |
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0.1 |
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Other Income (Expense) Net |
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(2.7 |
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2.3 |
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0.5 |
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19.4 |
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Non-Operating Income (Expense) Net |
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(6.1 |
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(0.5 |
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(7.0 |
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10.9 |
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Income Before Provision for Income
Taxes |
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73.1 |
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72.4 |
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220.4 |
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213.9 |
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Provision for Income Taxes |
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41.8 |
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25.2 |
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90.1 |
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77.4 |
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Equity in Net Income of Affiliates |
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0.4 |
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0.3 |
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0.6 |
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0.3 |
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Net Income |
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$ |
31.7 |
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$ |
47.5 |
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$ |
130.9 |
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$ |
136.8 |
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Basic Earnings per Share of Common
Stock |
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$ |
0.48 |
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$ |
0.68 |
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$ |
1.95 |
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$ |
1.93 |
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Diluted Earnings per Share of Common
Stock |
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$ |
0.46 |
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$ |
0.65 |
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$ |
1.87 |
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$ |
1.86 |
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Weighted Average Number of Shares
Outstanding |
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Basic |
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66,479,000 |
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69,924,000 |
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67,127,000 |
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70,867,000 |
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Weighted Average Number of Shares
Outstanding |
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Diluted |
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69,205,000 |
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72,685,000 |
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69,933,000 |
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73,571,000 |
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The accompanying notes are an integral part of the consolidated financial statements.
3
The Dun & Bradstreet Corporation
Consolidated Balance Sheets
Amounts in millions, except share data
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September 30, |
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December 31, |
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2005 |
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2004 |
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(Unaudited) |
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ASSETS |
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Current Assets |
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Cash and Cash Equivalents |
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$ |
264.6 |
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$ |
252.9 |
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Marketable Securities |
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82.6 |
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Accounts Receivable Net of Allowance of $19.6 at
September 30, 2005 and $19.4 at December 31, 2004 |
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301.9 |
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382.1 |
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Other Receivables |
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9.8 |
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16.8 |
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Deferred Income Tax |
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15.3 |
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15.9 |
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Other Current Assets |
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21.3 |
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11.8 |
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Total Current Assets |
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612.9 |
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762.1 |
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Non-Current Assets |
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Property, Plant and Equipment, Net of Accumulated
Depreciation of $195.7 at September 30, 2005 and $202.5 at
December 31, 2004 |
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46.1 |
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51.2 |
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Prepaid Pension Costs |
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472.1 |
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455.3 |
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Computer Software, Net of Accumulated Amortization of $341.2
at September 30, 2005 and $328.0 at December 31, 2004 |
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31.0 |
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32.4 |
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Goodwill, Net |
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222.9 |
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217.0 |
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Deferred Income Tax |
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64.6 |
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60.9 |
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Other Non-Current Assets |
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51.8 |
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56.6 |
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Total Non-Current Assets |
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888.5 |
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873.4 |
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Total Assets |
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$ |
1,501.4 |
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$ |
1,635.5 |
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Current Liabilities |
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Accounts Payable |
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$ |
31.8 |
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$ |
50.2 |
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Accrued Payroll |
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84.5 |
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110.8 |
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Accrued Income Tax |
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17.7 |
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22.2 |
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Short Term Debt |
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303.0 |
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Other Accrued and Current Liabilities |
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163.6 |
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141.8 |
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Deferred Revenue |
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387.3 |
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388.6 |
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Total Current Liabilities |
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987.9 |
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713.6 |
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Pension and Post-retirement Benefits |
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441.0 |
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468.0 |
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Long Term Debt |
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0.3 |
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300.0 |
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Other Non-Current Liabilities |
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65.4 |
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99.7 |
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Contingencies (Note 8) |
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Shareholders Equity |
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Preferred Stock, $0.01 par value per share,
authorized 10,000,000 shares;
outstanding none |
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Series Common Stock, $0.01 par value per share,
authorized 10,000,000 shares;
outstanding none |
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Common Stock, $0.01 par value per share,
authorized 200,000,000 shares
issued 81,945,520 shares |
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0.8 |
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0.8 |
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Unearned Compensation Restricted Stock |
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(7.3 |
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(1.4 |
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Capital Surplus |
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196.9 |
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198.2 |
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Retained Earnings |
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801.2 |
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670.3 |
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Treasury Stock, at cost, 15,557,002 shares at September 30,
2005 and 13,331,966 shares at December 31, 2004 |
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(712.5 |
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(557.6 |
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Cumulative Translation Adjustment |
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(161.8 |
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(149.0 |
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Minimum Pension Liability Adjustment |
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(110.5 |
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(107.1 |
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Total Shareholders Equity |
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6.8 |
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54.2 |
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Total Liabilities and Shareholders Equity |
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$ |
1,501.4 |
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$ |
1,635.5 |
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The accompanying notes are an integral part of the consolidated financial statements.
4
The Dun & Bradstreet Corporation
Consolidated Statements of Cash Flows (Unaudited)
Amounts in millions
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Nine Months Ended |
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September 30, |
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2005 |
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2004 |
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Cash Flows from Operating Activities: |
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Net Income |
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$ |
130.9 |
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$ |
136.8 |
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Reconciliation of Net Income to Net Cash Provided by
Operating Activities: |
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Depreciation and Amortization |
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26.0 |
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34.3 |
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Gain from Sales of Businesses |
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(0.8 |
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(18.2 |
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Income Tax Benefit due to Exercise of Stock Awards Under
Incentive Plans |
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35.2 |
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5.4 |
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Stock Based Compensation |
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11.1 |
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1.0 |
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Restructuring Expense, Net and Other Asset Impairments |
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21.6 |
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21.9 |
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Restructuring Payments |
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(26.8 |
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(19.6 |
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Deferred Income Taxes, Net |
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(35.7 |
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(61.4 |
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Accrued Income Taxes, Net |
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3.5 |
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82.1 |
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Changes in Current Assets and Liabilities: |
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Decrease in Accounts Receivable |
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59.7 |
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61.7 |
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Net Increase in Other Current Assets |
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(8.0 |
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(1.1 |
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Net Increase in Deferred Revenue |
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5.2 |
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7.5 |
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Net Decrease in Accounts Payable |
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(16.0 |
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(20.1 |
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Net Increase (Decrease) in Accrued Liabilities |
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1.7 |
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(27.2 |
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Net Decrease in Other Accrued and Current Liabilities |
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(9.1 |
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(9.4 |
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Changes in Non-Current Assets and Liabilities: |
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Net Increase in Other Long Term Assets |
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(13.8 |
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(29.9 |
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Net (Decrease) Increase in Long Term Liabilities |
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(26.1 |
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10.3 |
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Other |
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0.5 |
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0.2 |
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Net Cash Provided by Operating Activities |
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159.1 |
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174.3 |
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Cash Flows from Investing Activities: |
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Investments for Marketable Securities |
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(99.0 |
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(213.5 |
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Redemptions for Marketable Securities |
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181.6 |
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136.7 |
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Cash Proceeds from Sales of Businesses, Net of Cash
Divested |
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18.5 |
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56.5 |
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Payments for Acquisitions of Businesses, Net of Cash
Acquired |
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(17.9 |
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Cash Settlements of Foreign Currency Contracts |
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0.1 |
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(2.6 |
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Capital Expenditures |
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(4.5 |
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(9.1 |
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Additions to Computer Software and Other Intangibles |
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(13.4 |
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(10.5 |
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Net Assets Held for Sales of Businesses |
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(5.1 |
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Other |
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0.6 |
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(0.8 |
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Net Cash Provided by (Used in) Investing Activities |
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66.0 |
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(48.4 |
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Cash Flows from Financing Activities: |
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Payments for Purchases of Treasury Shares |
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(207.6 |
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(189.4 |
) |
Net Proceeds from Stock Plans |
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18.5 |
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14.2 |
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Spin-off Obligation |
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(9.2 |
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Increase in Other Short-Term Borrowings |
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1.0 |
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0.1 |
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Other |
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0.3 |
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0.2 |
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Net Cash Used in Financing Activities |
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(197.0 |
) |
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(174.9 |
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Effect of Exchange Rate Changes on Cash and Cash
Equivalents |
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(16.4 |
) |
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3.8 |
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Increase (Decrease) in Cash and Cash Equivalents |
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11.7 |
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(45.2 |
) |
Cash and Cash Equivalents, Beginning of Period |
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|
252.9 |
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|
239.0 |
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Cash and Cash Equivalents, End of Period |
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$ |
264.6 |
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$ |
193.8 |
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Supplemental Disclosure of Cash Flow Information: |
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Cash Paid |
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Income Taxes, Net of Refunds |
|
$ |
87.1 |
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$ |
44.1 |
|
Interest |
|
$ |
18.8 |
|
|
$ |
17.6 |
|
The accompanying notes are an integral part of the consolidated financial statements.
5
THE DUN & BRADSTREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(Tabular dollar amounts in millions, except per share data)
Note 1 Basis of Presentation
These interim consolidated financial statements have been prepared in accordance with the
instructions to Form 10-Q. They should be read in conjunction with the consolidated financial
statements and related notes, which appear in The Dun & Bradstreet Corporations (D&B or We)
Annual Report on Form 10-K for the year ended December 31, 2004. The consolidated results for
interim periods do not include all disclosures required by accounting principles generally accepted
in the United States of America for annual financial statements and are not necessarily indicative
of results for the full year or any subsequent period. In the opinion of our management, all
adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation
of the consolidated financial position, results of operations, and cash flows at the dates and for
the periods presented have been included. All significant inter-company transactions have been
eliminated in consolidation.
The financial statements of the subsidiaries included in our International segment, except for
our Canadian region, reflect a quarter ended August 31, 2005, in order to facilitate timely
reporting of our consolidated financial results and financial position.
Where appropriate, we have reclassified certain prior period amounts to conform to our current
presentation.
Note 2 Recent Accounting Pronouncements
On December 8, 2003, the Medicare Prescription Drug, Improvement and Modernization Act of 2003
(the Medicare Reform Act) was signed into law. In connection with the Medicare Reform Act, the
Financial Accounting Standards Board (FASB) issued FASB Staff Position (FSP) No. FAS 106-2,
Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and
Modernization Act of 2003. FSP No. FAS 106-2 provides guidance on accounting for the effects of
the new Medicare prescription drug legislation for employers whose prescription drug benefits are
actuarially equivalent to the drug benefit under Medicare Part D and are therefore entitled to
receive subsidies from the federal government beginning in 2006. The FSP was adopted for periods
beginning after July 1, 2004. Under the FSP, if a company concludes that its defined benefit
post-retirement benefit plan is actuarially equivalent to the Medicare Part D benefit, the employer
should recognize subsidies from the federal government in the measurement of the accumulated
post-retirement benefit obligation (APBO) under Statement of Financial Accounting Standards
(SFAS) No. 106, Employers Accounting for Post-retirement Benefits Other Than Pensions. The
resulting reduction of the APBO should be accounted for as an actuarial gain. On January 21, 2005,
the Centers for Medicare and Medicaid Services (CMS) released final regulations implementing
major provisions of the Medicare Reform Act of 2003. The regulations address key concepts, such as
defining a plan, as well as the actuarial equivalence test for purposes of obtaining a government
subsidy. Pursuant to the guidance in FSP No. FAS 106-2, we have assessed the financial impact of
the regulations and concluded that our post-retirement benefit plan will qualify for the direct
subsidies for an additional seven years and that our APBO decreased
by, approximately, an
additional $4.8 million. As a result, our 2005 post-retirement benefit cost is expected to decrease
by, approximately, $0.7 million. Together with the impacts already included in our December 31, 2004
results, the APBO decreased by a total of $35.8 million and our plan is expected to be actuarially
equivalent in 2006 until 2023, before the impact of the sharing strategy (see Note 14 Subsequent
Events for further detail).
In December 2004, the FASB
issued SFAS No. 123 (revised 2004) or SFAS No. 123R, Share-Based
Payments, which revises SFAS No. 123, Accounting for Stock-Based Compensation, and supercedes
Accounting Principle Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees. This
standard requires companies to recognize in the statement of operations the cost of employee
services received in exchange for awards of equity instruments based on the grant-date fair value
of the award (with limited
6
THE DUN & BRADSTREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
exceptions). The cost will be recognized over the period that an
employee provides service in exchange for the award, which normally would be the vesting period.
The standard has two transition application methods to choose from. They are the Modified
Prospective application or Modified Retrospective application. Under the Modified Prospective
application, compensation cost is recognized for new grants and modifications made after the required effective date, plus the remaining unrecognized expense associated with previously
issued awards that are not vested as of the date of adoption. Prior periods remain unchanged and
pro forma disclosures previously required by SFAS No. 123 continue to be required. Under the
Modified Retrospective application, a company is required to restate its financial statements back
either (a) to all prior years for which SFAS No. 123 was effective or (b) to only prior interim
periods in the year in which SFAS No. 123R is adopted. In April 2005, the Securities and Exchange
Commission (SEC) announced
the adoption of a rule that defers the required effective date of SFAS No. 123R. The SEC rule
provides that Statement No. 123R is now effective for registrants as of the beginning of the first
fiscal year beginning after June 15, 2005, instead of at the beginning of the first quarter after
June 15, 2005 (as prescribed originally by the FASB Statement). Accordingly, we will defer the
adoption of SFAS No. 123R until January 1, 2006 at which time we will begin to utilize the Modified
Prospective application.
In December 2004, the FASB issued FSP No. FAS 109-1, Application of FASB Statement No. 109,
Accounting for Income Taxes, to the Tax Deduction on Qualified Production Activities Provided by
the American Jobs Creation Act of 2004. On October 22, 2004, the American Jobs Creation Act of
2004 (the Act) was signed into law. The Act provides a deduction from income for qualified
domestic production activities, which will be phased in from 2005 through 2010. In return, the Act
also provides for a two-year phase-out of the existing extra-territorial income exclusion (ETI)
for foreign sales. FSP No. FAS 109-1 provides guidance on the accounting implications of the Act
related to the deduction for qualified domestic production activities. The deduction will be
treated as a special deduction as described in SFAS No. 109. As such, the special deduction has
no effect on deferred tax assets and liabilities existing at the enactment date. Rather, the impact
of this deduction, if any, will be reported in the period in which the deduction is claimed on our
tax return. We are currently assessing the impact of proposed Treasury regulations, which will
clarify certain provisions of the Act. Until final resolution of this matter, management will be
unable to determine the full impact this will have on our effective income tax rate.
In December 2004, the FASB issued FSP No. FAS 109-2, Accounting and Disclosure Guidance for
the Foreign Earnings Repatriation Provision within the American Jobs Creation Act of 2004. FSP No.
FAS 109-2 provides guidance under SFAS No. 109 with respect to recording the potential impact of
the repatriation provisions of the Act in income tax expense and deferred tax liability. The Act
provides for a temporary 85% dividends received deduction on certain foreign earnings repatriated
from our controlled foreign corporations. To qualify for the deduction, the earnings must be
reinvested in the United States pursuant to a domestic reinvestment plan established by our senior
management and approved by the Board of Directors. During the third quarter of fiscal year 2005,
our Chief Executive Officer and Board of Directors approved a domestic reinvestment plan as
required by the Act. We expect to repatriate approximately $140 million in extraordinary dividends,
as defined in the Act, during the fourth quarter of fiscal year 2005 and, accordingly, have
recorded a tax liability of $9.1 million as of September 30, 2005.
Note 3 Impact of Implementation of the Blueprint for Growth Strategy
Restructuring Charges
Since the launch of our Blueprint for Growth strategy, we have implemented several Financial
Flexibility Programs. In each of these Programs, we identified ways to reduce our expense base,
then we reallocated some of the identified spending to other areas of our operations to improve
revenue growth. With each Program, we have incurred a restructuring charge, which generally
consists of employee severance and termination costs, asset write-offs, and/or costs to terminate
lease obligations less assumed sublease income. These charges are
7
THE DUN & BRADSTREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
incurred as a result of
eliminating, consolidating, standardizing, automating and/or outsourcing operations of our
business. We have also incurred transition costs such as consulting fees, costs of temporary
workers, relocation costs and stay bonuses to implement our Financial Flexibility Programs.
During the three month and nine month periods ended September 30, 2005, we recognized a net
restructuring charge of $4.7 million and $21.6 million respectively, consisting of the following
two Financial Flexibility Programs:
|
|
|
During the three months ended, September 30, 2005, we recognized a $4.5 million
restructuring charge in connection with the 2005 Financial Flexibility Program announced in
February 2005 (2005 Financial Flexibility Program). The charge was recorded in accordance
with SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities. The
charge included $4.1 million for severance and termination costs related to approximately 60
employees, $0.1 million pension plan curtailment charge and $0.3 million for other costs to
consolidate or close facilities and relocate employees. During the three months ended
September 30, 2005, approximately 44 employees were terminated in conjunction with our 2005
Financial Flexibility Program. Under SFAS No. 146, the current period charge represents the
liabilities incurred during the quarter for each of these obligations. |
|
|
|
|
During the nine months ended September 30, 2005, we recognized a $22.0 million of restructuring
charge in connection with the 2005 Financial Flexibility program. The year-to-date charge
includes $20.2 million for severance and termination costs related to approximately 340
employees, $0.4 million pension plan charge and $1.4 million in for lease termination
obligations. We expect to record approximately $30.0 million to $31.0 million for all
restructuring charges related to the 2005 Financial Flexibility Program including $27.0
million to $28.0 million for severance and termination costs related to approximately 400
positions and $3 million for lease termination obligations and other costs to consolidate or
close facilities and relocate employees. |
|
|
|
|
In addition, during the three months ended September 30, 2005, we recognized a $0.2
million net restructuring charge for the International Business Machines Corporation (IBM)
outsourcing agreement in connection with the 2004 Financial Flexibility Program announced in
February 2004 (2004 Financial Flexibility Program). The charge included $0.3 million for
severance and termination costs related to approximately 50 employees partially offset by a
$0.1 million post-retirement curtailment gain due to the 2004 Financial Flexibility Program
employee actions discussed below. During the three months ended September 30, 2005,
approximately 24 employees were terminated in conjunction with our 2004 Financial
Flexibility Program. Under SFAS No. 146, the current period charge represents the
liabilities incurred during the quarter for each of these obligations. |
|
|
|
|
During the nine months ended September 30, 2005, we recognized $0.4 million of restructuring
gain in connection with the 2004 Financial Flexibility Program. The year-to-date gain
includes $5.4 million for severance and termination costs related to approximately 630
employees and $5.8 million post-retirement curtailment gain. We expect to record
approximately $5 million before the effects of the post-retirement curtailment gain of
approximately $6 million by the end of 2005. |
|
|
|
|
In accordance with SFAS No. 106, Employers Accounting For Post-Retirement Benefits Other
Than Pensions, we were required to recognize a curtailment gain for the post-retirement
plans related to the employee actions of the 2004 Financial Flexibility Program and 2005
Financial Flexibility Program. The curtailment accounting required us to recognize
immediately a pro-rata portion of the unrecognized prior service cost as a result of the
layoffs. During the three month and nine month periods ended September 30, 2005, we
recognized a $0.1 million and $5.8 million curtailment gain, respectively, related to our
post-retirement benefit plan which was recorded as an increase to earnings. For the three
month and nine months ended September 30, 2005, this curtailment gain is included in the
$4.7 million |
8
THE DUN & BRADSTREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
|
|
and $21.6 million net restructuring charge recorded for the 2004 Financial
Flexibility Program and 2005 Financial Flexibility Program
discussed above. |
During the three months ended September 30, 2004, we recognized a $2.7 million restructuring
charge in connection with our 2004 Financial Flexibility Program in accordance with SFAS No. 146.
The charge of $2.6 million was for severance and termination costs related to approximately 800
employees who were terminated in conjunction with the 2004 Financial Flexibility Program and $0.1
million for lease termination obligations. During of the nine months ended September 30, 2004, we
recorded $20.9 million of restructuring charges in connection with the 2004 Financial Flexibility
program. The year-to-date charge includes $19.4 million for severance and termination costs related
to approximately 350 employees and $1.5 million for lease termination obligations.
As of September 30, 2005, we have eliminated approximately 4,800 positions (including 300 open
positions) and terminated (via attrition and termination) approximately 4,500 employees under our
Financial Flexibility Program since its inception in October 2000. These figures include the 220
employees who were transitioned to IBM as part of the 2004 Financial Flexibility Program and the
approximately 400 employees who were transitioned to Computer Sciences Corporation (CSC) as part
of the 2002 Financial Flexibility Program. Under the terms of the CSC agreement, we outsourced
certain technology functions in which approximately 400 of our employees who performed data center
operations, technology help desk and network management functions in the United States and in the
United Kingdom were transitioned to CSC.
The following table sets forth, in accordance with SFAS No. 146, the restructuring reserves
and utilization to date related to our 2005 Financial Flexibility Program.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lease |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Termination |
|
|
|
|
|
|
Severance |
|
|
Pension Plan |
|
|
Obligations |
|
|
|
|
|
|
and |
|
|
Curtailment |
|
|
and Other |
|
|
|
|
|
|
Termination |
|
|
Charges (Gains) |
|
|
Exit Costs |
|
|
Total |
|
2005 Restructuring Charges |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charge Taken during First Quarter
2005 |
|
$ |
7.9 |
|
|
$ |
|
|
|
$ |
0.3 |
|
|
$ |
8.2 |
|
Payments during First Quarter 2005 |
|
|
(2.4 |
) |
|
|
|
|
|
|
(0.2 |
) |
|
|
(2.6 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance Remaining as of March 31,
2005 |
|
$ |
5.5 |
|
|
$ |
|
|
|
$ |
0.1 |
|
|
$ |
5.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charge Taken during Second Quarter
2005 |
|
$ |
8.2 |
|
|
$ |
0.3 |
|
|
$ |
0.8 |
|
|
$ |
9.3 |
|
Payments/Pension Plan Curtailment Charge
during Second Quarter 2005 |
|
|
(5.0 |
) |
|
|
(0.3 |
) |
|
|
(0.1 |
) |
|
|
(5.4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance Remaining as of June 30, 2005 |
|
$ |
8.7 |
|
|
$ |
|
|
|
$ |
0.8 |
|
|
$ |
9.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charge Taken during Third Quarter
2005 |
|
$ |
4.1 |
|
|
$ |
0.1 |
|
|
$ |
0.3 |
|
|
$ |
4.5 |
|
Payments/Pension Plan Curtailment Charge
during Third Quarter 2005 |
|
|
(6.8 |
) |
|
|
(0.1 |
) |
|
|
(0.3 |
) |
|
|
(7.2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance Remaining as of September 30,
2005 |
|
$ |
6.0 |
|
|
$ |
|
|
|
$ |
0.8 |
|
|
$ |
6.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9
THE DUN & BRADSTREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
The following table sets forth, in accordance with SFAS No. 146, the restructuring reserves
and utilization to date related to our 2004 Financial Flexibility Program.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lease |
|
|
|
|
|
|
|
|
|
|
Pension Plan/ |
|
|
Termination |
|
|
|
|
|
|
Severance |
|
|
Post-retirement |
|
|
Obligations |
|
|
|
|
|
|
and |
|
|
Curtailment |
|
|
and Other |
|
|
|
|
|
|
Termination |
|
|
Charges (Gains) |
|
|
Exit Costs |
|
|
Total |
|
2004 Restructuring Charges: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charge Taken during First Quarter
2004 |
|
$ |
9.3 |
|
|
$ |
|
|
|
$ |
0.9 |
|
|
$ |
10.2 |
|
Payments during First Quarter 2004 |
|
|
(3.8 |
) |
|
|
|
|
|
|
(0.9 |
) |
|
|
(4.7 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance Remaining as of March 31,
2004 |
|
$ |
5.5 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
5.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charge Taken during Second Quarter
2004 |
|
$ |
7.5 |
|
|
$ |
|
|
|
$ |
0.5 |
|
|
$ |
8.0 |
|
Payments during Second Quarter 2004 |
|
|
(4.1 |
) |
|
|
|
|
|
|
|
|
|
|
(4.1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance Remaining as of June 30, 2004 |
|
$ |
8.9 |
|
|
$ |
|
|
|
$ |
0.5 |
|
|
$ |
9.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charge Taken during Third Quarter
2004 |
|
$ |
2.6 |
|
|
$ |
|
|
|
$ |
0.1 |
|
|
$ |
2.7 |
|
Payments during Third Quarter 2004 |
|
|
(7.1 |
) |
|
|
|
|
|
|
(0.4 |
) |
|
|
(7.5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance Remaining as of September 30,
2004 |
|
$ |
4.4 |
|
|
$ |
|
|
|
$ |
0.2 |
|
|
$ |
4.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charge Taken during Fourth Quarter
2004 |
|
$ |
9.0 |
|
|
$ |
0.5 |
|
|
$ |
1.6 |
|
|
$ |
11.1 |
|
Payments/Pension Plan and
Post-retirement Net Charges during
Fourth Quarter 2004 |
|
|
(6.2 |
) |
|
|
(0.5 |
) |
|
|
(1.1 |
) |
|
|
(7.8 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance Remaining as of December 31,
2004 |
|
$ |
7.2 |
|
|
$ |
|
|
|
$ |
0.7 |
|
|
$ |
7.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charge Taken during First Quarter
2005 |
|
$ |
5.0 |
|
|
$ |
(2.8 |
) |
|
$ |
|
|
|
$ |
2.2 |
|
Payments/Post-retirement Gain during
First Quarter 2005 |
|
|
(3.6 |
) |
|
|
2.8 |
|
|
|
|
|
|
|
(0.8 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance Remaining as of March 31,
2005 |
|
$ |
8.6 |
|
|
$ |
|
|
|
$ |
0.7 |
|
|
$ |
9.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charge Taken during Second Quarter
2005 |
|
$ |
0.1 |
|
|
$ |
(2.9 |
) |
|
$ |
|
|
|
$ |
(2.8 |
) |
Payments/Post-retirement Gain during
Second Quarter 2005 |
|
|
(4.6 |
) |
|
|
2.9 |
|
|
|
(0.1 |
) |
|
|
(1.8 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance Remaining as of June 30, 2005 |
|
$ |
4.1 |
|
|
$ |
|
|
|
$ |
0.6 |
|
|
$ |
4.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charge Taken during Third Quarter
2005 |
|
$ |
0.3 |
|
|
$ |
(0.1 |
) |
|
$ |
|
|
|
$ |
0.2 |
|
Payments/Post-retirement Gain during
Third Quarter 2005 |
|
|
(3.0 |
) |
|
|
0.1 |
|
|
|
(0.1 |
) |
|
|
(3.0 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance Remaining as of September 30,
2005 |
|
$ |
1.4 |
|
|
$ |
|
|
|
$ |
0.5 |
|
|
$ |
1.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 4 Acquisitions
On July 22, 2005, we acquired a 100% ownership interest in LiveCapital, Inc. located in San
Mateo, California, with cash on hand. The results of LiveCapital Inc.s operations have been
included in our consolidated financial statements. LiveCapital, Inc. is a provider
of online credit management software that enables users to manage the entire credit process
within an enterprise-wide system. The acquisition is part of our ongoing effort to improve our
customers access to our DUNSRight quality process, so that they can make confident business
decisions.
10
THE DUN & BRADSTREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
The
transaction was valued at $17.1 million, inclusive of cash
acquired of $0.5 million, and
$0.3 million of transaction costs recorded in accordance with SFAS No. 141, Business
Combinations. The acquisition was accounted for under the purchase method of accounting. As a
result, we recognized goodwill and an intangible asset of $11.8 million and $1.8 million,
respectively. The remaining purchase price was allocated to the acquired assets and liabilities on
the basis of their respective fair values. The goodwill was assigned to our U.S. segment. The
intangible asset acquired for $1.8 million was related to module technology with a useful life of
four years. The acquisition would not have had a material impact on our results had the acquisition
occurred at the beginning of 2005, and, as such, the pro forma results have not been presented.
We are in the process of finalizing the valuation of the acquired deferred tax asset in
connection with the acquisition. As a result, the allocation of the purchase price is subject to
refinement.
Note 5 Notes Payable and Indebtedness
Our borrowings at September 30, 2005 and December 31, 2004, including interest rate swaps
designated as hedges, are summarized below:
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2005 |
|
|
2004 |
|
|
|
Liability (Asset) |
|
Debt Maturing Within One Year: |
|
|
|
|
|
|
|
|
Fixed-rate notes |
|
$ |
300.0 |
|
|
$ |
|
|
Fair value of interest rate swaps |
|
|
(0.1 |
) |
|
|
|
|
Credit Lines |
|
|
2.0 |
|
|
|
|
|
Other |
|
|
1.1 |
|
|
|
|
|
|
|
|
|
|
|
|
Total Debt Maturing Within One Year |
|
$ |
303.0 |
|
|
$ |
|
|
|
|
|
|
|
|
|
Long Term Debt: |
|
|
|
|
|
|
|
|
Fixed-rate notes |
|
$ |
|
|
|
$ |
301.8 |
|
Fair value of interest rate swaps |
|
|
|
|
|
|
(1.9 |
) |
Other |
|
|
0.3 |
|
|
|
0.1 |
|
|
|
|
|
|
|
|
Total Debt Maturing After One Year |
|
$ |
0.3 |
|
|
$ |
300.0 |
|
|
|
|
|
|
|
|
We have outstanding notes with an aggregate face value of $300 million and five year terms,
maturing in March 2006. These notes bear interest at a fixed annual rate of 6.625% and are payable
semi-annually. During the first quarter of 2005, these notes were reclassified from long term debt
to short term debt because they will mature within one year. We have entered into interest rate
swap agreements to hedge a portion of this debt (see Note 6 to the Notes to Consolidated Financial
Statements to our Annual Report on Form 10-K for the year ended December 31, 2004 for a more
detailed description). At September 30, 2005 and December 31, 2004, the notes and the fair value of
the interest rate swaps are recorded as Short Term Debt and Long Term Debt, respectively.
On September 30, 2005, we entered into an interest rate derivative transaction with an
aggregate notional amount of $200 million. The objective of the hedge is to eliminate the
variability of future cash flows from market changes in treasury rates in the anticipation of
a future debt issuance during the first half of 2006. This transaction will be accounted for as a
cash flow hedge. As such, changes in fair value of the swap that take place through the date of
debt issuance will be recorded in accumulated other comprehensive income. As of September 30, 2005,
the derivative transaction had no impact to accumulated other comprehensive income.
11
THE DUN & BRADSTREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
Other Credit Facilities
At September 30, 2005, we have $300 million of bank credit facilities available at prevailing
short term interest rates, which will expire in September 2009. These facilities also support our
commercial paper borrowings up to $300 million. We have not drawn on the facilities and we did not
have any borrowings outstanding under these facilities at September 30, 2005. We also have not
borrowed under our commercial paper program in 2005. We believe that cash flows generated from
operations, supplemented as needed with readily available financing arrangements, are sufficient to
meet our short term and long term needs. The facilities require the maintenance of interest
coverage and total debt to EBITDA ratios (as defined in the agreement). As of September 30, 2005,
we were in compliance with these requirements.
At September 30, 2005, certain of our international operations had non-committed lines of
credit of $12.8 million and had $2.0 million of borrowings outstanding under these lines of credit.
These arrangements have no material commitment fees or compensating balance requirements.
Note 6 Reconciliation of Weighted Average Shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
(Share data in thousands) |
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
Weighted average number of shares basic |
|
|
66,479 |
|
|
|
69,924 |
|
|
|
67,127 |
|
|
|
70,867 |
|
Dilutive effect of shares issuable under stock
options, restricted stock and performance share
plans |
|
|
2,616 |
|
|
|
2,712 |
|
|
|
2,472 |
|
|
|
2,640 |
|
Adjustment of shares applicable to stock options
exercised during the period and performance
share plans |
|
|
110 |
|
|
|
49 |
|
|
|
334 |
|
|
|
64 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares diluted |
|
|
69,205 |
|
|
|
72,685 |
|
|
|
69,933 |
|
|
|
73,571 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the three months ended September 30, 2005 and 2004, we repurchased 201,681 and 56,739
shares of stock for $12.5 million and $3.0 million, respectively, to mitigate the dilutive effect
of the shares issued under our stock incentive plans and Employee Stock Purchase Plan. During the
three months ended September 30, 2005, we also repurchased 793,494 shares in connection with the
$400 million, two-year share repurchase program approved by the Board of Directors in February
2005, for $50.7 million. During the three months ended September 30, 2004, we repurchased 964,561
shares in connection with the $200 million share repurchase program, approved by the Board of
Directors in February 2004, for $53.2 million.
For the nine months ended September 30, 2005 and 2004, we repurchased 924,094 and 919,000
shares of stock for $57.0 million and $48.7 million, respectively, to mitigate the dilutive effect
of the shares under our stock incentive plans and Employee Stock Purchase Plan. For the nine months
ended September 30, 2005, we also repurchased 2,415,381 shares in connection with the $400 million
share repurchase program for $150.6 million. Additionally, during the nine months ended September
30, 2004, we repurchased 2,591,940 shares in connection with the $200 million share repurchase
program, approved by the Board of Directors in February 2004, for $140.7 million.
For the quarter-to-date computation of diluted earnings per share, options to purchase 51,900
and 33,100 shares of common stock were outstanding at September 30, 2005 and 2004, respectively,
but were not included in the quarter-to-date computation of diluted earnings per share because the
options exercise prices were greater than the average market price of the common stock. Options to
purchase 111,100 and 82,500 shares of common stock were outstanding at September 30, 2005 and 2004,
respectively, but were not included in the year-to-date computation of diluted earnings per share
because the options exercise prices
12
THE DUN & BRADSTREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
were greater than the average market price of the common
stock. Our options generally expire 10 years after the grant date.
Note 7 Comprehensive Income
Total comprehensive income for the three month and nine month periods ended September 30, 2005
and 2004, which includes net income and other gains and losses that affect shareholders equity,
was as follows:
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|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
Net Income |
|
$ |
31.7 |
|
|
$ |
47.5 |
|
|
$ |
130.9 |
|
|
$ |
136.8 |
|
Other Comprehensive Income (Loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign Currency Translation Adjustment |
|
|
(0.8 |
) |
|
|
(2.9 |
) |
|
|
(12.8 |
) |
|
|
6.8 |
|
Minimum Pension Liability |
|
|
|
|
|
|
(1.7 |
) |
|
|
(3.4 |
) |
|
|
(6.6 |
) |
Unrealized Gains (Losses) On Investments |
|
|
|
|
|
|
0.1 |
|
|
|
|
|
|
|
0.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Comprehensive Income |
|
$ |
30.9 |
|
|
$ |
43.0 |
|
|
$ |
114.7 |
|
|
$ |
137.5 |
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|
|
|
|
|
|
|
|
|
|
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|
Note 8 Contingencies
We are involved in tax and legal proceedings, claims and litigation arising in the ordinary
course of business. We periodically assess our liabilities and contingencies in connection with
these matters based upon the latest information available. For those matters where it is probable
that we have incurred a loss and the loss or range of loss can be reasonably estimated, we have
recorded reserves in our consolidated financial statements. In other instances, we are unable to
make a reasonable estimate of any liability because of the uncertainties related to the probability
of the outcome and/or amount or range of loss. As additional information becomes available, we
adjust our assessment and estimates of such liabilities accordingly. It is possible that the
ultimate resolution of our liabilities and contingencies could be at amounts that are different
from our currently recorded reserves and that such differences could be material.
Based on our review of the latest information available, we believe our ultimate liability in
connection with pending tax and legal proceedings, claims and litigation will not have a material
effect on our results of operations, cash flows or financial position, with the possible exception
of the matters described below.
In order to understand our exposure to the potential liabilities described below, it is
important to understand the relationship between us and Moodys Corporation, our predecessors and
other parties that, through various corporate reorganizations and contractual commitments, have
assumed varying degrees of responsibility with respect to such matters.
In November 1996, the company then known as The Dun & Bradstreet Corporation (D&B1)
separated through a spin off into three separate public companies: D&B1, ACNielsen Corporation
(ACNielsen) and Cognizant Corporation (Cognizant) (the 1996 Distribution). This was
accomplished through a spin off by D&B1 of its stock in ACNielsen and Cognizant. In September 1998,
D&B1 separated through a spin off into two separate public companies: D&B1, which changed its name
to R.H. Donnelley Corporation (Donnelley/D&B1), and a new company named The Dun & Bradstreet
Corporation (D&B2) (the 1998 Distribution). During 1998, Cognizant separated into two separate
public companies: IMS Health Incorporated (IMS) and Nielsen Media Research, Inc. (NMR) (the
1998 Cognizant Distribution). In September 2000, D&B2 separated through a spin off into two
separate public companies: D&B2, which changed its name to Moodys Corporation (Moodys and also
referred to elsewhere in this Form 10-Q as Moodys/D&B2), and a new company named The Dun &
Bradstreet
13
THE DUN & BRADSTREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
Corporation (we or D&B3 and also referred to elsewhere in this Form 10-Q as D&B)
(the 2000 Distribution).
Tax Matters
Moodys/D&B2 and its predecessors entered into global tax-planning initiatives in the normal
course of business, principally through tax-free restructurings of both their foreign and domestic
operations. As further described below, we have contractual obligations to be financially
responsible for a portion of certain liabilities arising from two of these historical tax-planning
initiatives (Legacy Tax Matters). The status of these Legacy Tax Matters is summarized below.
Pursuant to a series of tax sharing agreements (the Tax Sharing Agreements), IMS and NMR are
jointly and severally liable for and must pay one-half, and we and Moodys/D&B2 are jointly and
severally liable for and must pay the other half, of any liabilities related to the matter
described below under the caption Royalty Expense Deductions
1993-1997 and we and Moodys/D&B2
are each jointly and severally liable for one-half of any liabilities related to the matter
described below under the caption Amortization and Royalty Expense Deductions/Royalty Income
1997-2005.
As further described below, we currently believe that we have adequate reserves for these
matters and, as a result, the ultimate resolution of these Legacy Tax Matters is not expected to
have a material impact on our earnings.
Royalty
Expense Deductions 1993-1997
In the third quarter of 2005, we settled this matter with the IRS with respect to tax years
1995 and 1996, which substantially resolved this matter, and, accordingly, we will no longer report
on this legacy tax matter in future filings.
Beginning in the second quarter of 2003, we received a series of communications on behalf of
Donnelley/D&B1 from the IRS proposing adjustments with respect to a partnership transaction entered
into in 1993. Specifically, the IRS proposed to disallow certain royalty expense deductions claimed
by Donnelley/D&Bl on its 1993-1997 tax returns.
On July 29, 2005, Donnelley/D&B1 (the taxpayer of record) entered into a settlement agreement
with the IRS resolving the royalty expense dispute for tax years 1995 and 1996. On September 27,
2005, the IRS issued two bills to Donnelley/D&B1 with respect to this settlement. The 1995 bill
totaled $53.6 million, and the 1996 bill totaled $82.2 million. Our share of this settlement was
satisfied by a combination of cash payments and the application of outstanding refund claims owed
to us by the IRS. Thus, with respect to the
two bills received from the IRS, we made cash payments of $28.2 million after the application
of $14.4 million of refunds owed to us by the IRS. Because these payments do not reflect the
associated benefits related to the deductibility of interest expense of $8.1 million, the impact to
cash flow of these payments in the third quarter of 2005 was $34.5 million (net of tax benefits).
We also expect to pay approximately $4.7 million (net of tax benefits) to various state and local
governments in resolution of this matter for tax years 1995 and 1996. Accordingly, the total impact
to cash flow relating to this matter for tax years 1995 and 1996 will be $39.2 million (net of tax
benefits).
In addition to the payments described above, on October 7, 2005, we paid an additional $5.8
million to the IRS in connection with the settlement and we expect to pay a further $1.5 million.
These payments arise from a dispute with IMS and NMR regarding their responsibility under the Tax
Sharing Agreements for certain portions of the settlement payment owed to the IRS by
Donnelley/D&B1. Our indemnification obligations to Donnelley/D&B1 require us and Moodys/D&B2 to
pay to the IRS, on behalf of Donnelley/D&B1, any portion of the settlement amount not paid by IMS
and NMR. As a result of this dispute with IMS and NMR, and given our indemnification obligations to
Donnelly/D&B1, we have paid, and expect to
14
THE DUN & BRADSTREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
pay, the further amounts identified above in excess of
our allocable share of the settlement under the terms of the Tax Sharing Agreements. The impact to
cash flow relating to these payments will be $5.8 million (net of tax benefits).
With regard to tax years 1993 and 1994, the IRS has claimed a right of offset to disallow
unrelated refunds belonging equally to D&B and Moodys/D&B2 totaling $20 million. This claimed
right of offset arises from the IRS proposed disallowance of royalty expense deductions relating
to this Royalty Expense Deductions 1993-1997 matter. We have filed a protest with the IRS with
respect to this proposed disallowance of these refunds. Under the Tax Sharing Agreements, IMS and
NMR are jointly and severally liable for and must pay one-half, and we and Moodys/D&B2 are jointly
and severally liable for and must pay the other half, of liabilities related to this Royalty
Expense Deductions 1993-1997 matter. If the IRS should ultimately prevail in its position, then we
could lose our allocable share of up to $5.0 million in the anticipated benefit of the refunds,
subject to each of IMS and NMR reimbursing D&B and Moodys/D&B2 for their $5.0 million allocable
shares of the lost benefit of the refunds, as we believe would be required by the Tax Sharing
Agreements.
With regard to tax year 1997, this tax year was not included as part of the settlement
described above and an adverse resolution with respect to this tax year could have an additional
impact to cash flow of up to $1.7 million (net of tax benefits).
As noted above, disputes exist between D&B and Moodys/D&B2 on the one hand and IMS and NMR on
the other, with respect to various payment obligations under the Tax Sharing Agreements. We believe
that the positions of IMS and NMR are contrary to their obligations under the Tax Sharing
Agreements. If we are unable to resolve these disputes with IMS and NMR through the negotiation
process contemplated by the Tax Sharing Agreements, we will commence arbitration proceedings to
enforce our rights to collect these amounts from IMS and NMR. While we believe we will prevail in
any such arbitration, we cannot predict with certainty that we will ultimately achieve this result.
Notwithstanding the foregoing, we believe that the ultimate resolution of these disputes will not
have a material adverse impact on our financial position, results of operations or cash flows.
Amortization
and Royalty Expense Deductions/ Royalty Income 1997-2005
In the fourth quarter of 2003, we received on behalf of Donnelley/D&B1 and Moodys/D&B2, IRS
notices of proposed adjustment for 1997 and 1998 with respect to a partnership transaction entered
into in 1997. The IRS asserted that certain amortization expense deductions claimed by
Donnelley/D&B1, and Moodys/D&B2 on their 1997 and 1998 tax returns should be disallowed. In April
2004, we received IRS proposed notices of deficiency for 1997 and 1998, proposing adjustments with
respect to the 1997 partnership transaction consistent with the notices of proposed adjustment.
We filed protests relating to this matter for the 1997 and 1998 tax years with the IRS Office
of Appeals. During the third quarter of 2004, we were informed by the IRS Office of Appeals that
the 1997 and 1998 tax years were being returned to the Examination Division of the IRS for further
development of the issues.
In the second quarter of 2005, we received, on behalf of Moodys/D&B2, D&B3 and the
partnership, IRS notices of proposed adjustment for 1999-2002, with respect to the same 1997
partnership transaction referred to above. The IRS again asserted that certain amortization expense
deductions claimed by Moodys/D&B2 and D&B3 on their
1999-2002 tax returns should be disallowed.
In August 2005, we received IRS proposed notices of deficiency
for 1999-2002, proposing
adjustments with respect to the same 1997 partnership transaction consistent with the notices of
proposed adjustment. We filed protests relating to this matter for
1999-2002 with the IRS Office
of Appeals.
In addition to the foregoing, the IRS has asserted, in the notices referred to above, that
royalty expense deductions claimed by Donnelley/D&B1, Moodys/D&B2, and D&B3 on their tax returns
for 1997-2002,
15
THE DUN & BRADSTREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
for royalties paid to the partnership should be disallowed. The IRS has also
asserted that the receipt of these same royalties by the partnership should be reallocated to and
reported as royalty income by Donnelley/D&B1, Moodys/D&B2, and D&B3, including the portions of the
royalties that were allocated to third-party partners in the partnership, and, thus included in
their taxable income. We believe that the IRS stated positions with respect to the treatment of
the royalty expense and royalty income are mutually inconsistent. If the IRS prevails on one of the
positions, we believe that it is unlikely that it will prevail on the other.
In addition to the foregoing, and in connection with the notices received during the second
quarter of 2005, the IRS has asserted that certain business expenses incurred by Moodys/D&B2 and
D&B3 during 1999-2002 should be capitalized and amortized over a 15-year period, if (but only
if) the proposed adjustments described above are not sustained.
We
estimate that the net impact to cash flow as a result of the disallowance of the 1997-2002 amortization deductions and the disallowance of such deductions claimed from 2003 to date
could be up to $66.6 million (tax, interest and penalties, net of tax benefits but not taking into
account the Moodys/D&B2 repayment to us of $34.0 million described below). This transaction is
scheduled to expire in 2012 and, unless terminated by us, the net impact to cash flow, based on
current interest rates and tax rates would increase at a rate of approximately $2.1 million per
quarter (including potential penalties) as future amortization expenses are deducted.
We also estimate that, with regard to the possible disallowance of deductions for royalty
expenses paid to the partnership and the reallocation of royalty income from the partnership, after
taking into account certain other tax benefits resulting from the IRS position on the partnership,
it is unlikely that there will be any net impact to cash flow in addition to the amounts noted
above related to the amortization expense deduction disallowance. In the unlikely event the IRS
were to prevail on both positions with respect to the royalty expense and royalty income, we
estimate that the net impact to cash flow as a result of the
disallowance of the 1997-2002
royalty expense deductions, and the inclusion of the reallocated royalty income for all relevant
years, could be up to $144.8 million (tax, interest, and penalties, net of tax benefits). This
$144.8 million would be in addition to the $66.6 million noted above related to the amortization
expense deduction.
At the time of the 2000 Distribution, we paid Moodys/D&B2 approximately $55 million in cash
representing the discounted value of future tax benefits associated with this transaction. However,
pursuant to the terms of the 2000 Distribution, should the transaction be terminated, Moodys/D&B2
would be required to repay us an amount equal to the discounted value of its 50% share of the
related future tax benefits. If the transaction was terminated at September 30, 2005, the amount of
such repayment from Moodys/D&B2 to us would be approximately $34.0 million and would decrease by
approximately $4.0 million to $5.0 million per year.
We are attempting to resolve this matter with the IRS before proceeding to litigation, if
necessary. If we, on behalf of Donnelley/D&B1, Moodys/D&B2, and D&B3 were to challenge, at any
time, any of these IRS positions for years 1997-2002 in U.S. District Court or the U.S. Court of
Federal Claims, rather than in U.S. Tax Court, the disputed amounts for each applicable year would
need to be paid in advance for the Court to have jurisdiction over the case.
Assessment of Potential Tax Matters
We have considered the foregoing legacy tax matters and the merits of the legal defenses and
the various contractual obligations in our overall assessment of potential tax liabilities. As of
September 30, 2005, we have net $72.1 million of reserves recorded in the consolidated financial
statements, made up of the following components; $11.3 million in Accrued Income Tax and $60.8
million in Other Non-Current Liabilities. We believe that these reserves are adequate for our share
of the liabilities in these legacy tax matters. Any payments that would be made for these exposures
could be significant to our cash from operations in the
16
THE DUN & BRADSTREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
period a cash payment took place, including
any payments for the purpose of obtaining jurisdiction in U.S. District Court or the U.S. Court of
Federal Claims to challenge any of the IRSs positions.
Legal Proceedings
Information
Resources, Inc.
Introduction
The following is a description of an antitrust lawsuit filed in 1996 by Information Resources,
Inc. (IRI). As more fully described below, VNU N.V., a publicly traded Dutch company (VNU), and
its U.S. subsidiaries VNU, Inc., ACNielsen, AC Nielsen (US), Inc.
(ACN (US)), and Nielsen Media Research (NMR) (collectively, the VNU Parties), have
assumed exclusive joint and several liability for any judgment or settlement of this antitrust
lawsuit. As a result of the indemnity obligation, D&B does not have any exposure to a judgment or
settlement of this lawsuit unless the VNU Parties default on their obligations. In the event of
such default, contractual commitments undertaken by D&B in connection with various corporate
reorganizations since 1996, including our spin-off from Moodys/D&B2 in 2000, require us to bear a
portion of any amount not paid by the VNU Parties. See below D&Bs Potential Exposure in the
Lawsuit. Moreover, as described below, on February 1, 2005, the U.S. District Court for the
Southern District of New York entered a final judgment against IRI dismissing IRIs claims. IRI
filed a notice of appeal to the Second Circuit Court of Appeals on February 2, 2005. The appeal is
fully briefed and argument took place on October 18, 2005.
Overview of the Lawsuit
In July 1996, IRI filed a complaint, subsequently amended in 1997, in the U.S. District Court
for the Southern District of New York, naming as defendants a company then known as The Dun &
Bradstreet Corporation and now known as R.H. Donnelley (referred to in this Form 10-Q as
Donnelley/D&B1), A.C. Nielsen Company (a subsidiary of ACNielsen) and IMS International, Inc. (a
subsidiary of the company then known as Cognizant Corporation). At the time of the filing of the
complaint, each of the other defendants was a wholly-owned subsidiary of Donnelley/D&B1.
The amended complaint alleges various violations of United States antitrust laws under
Sections 1 and 2 of the Sherman Antitrust Act. IRIs antitrust claims allege that defendants
developed and implemented a plan to undermine IRIs ability to compete within the United States and
foreign markets in North America, Latin America, Asia, Europe and Australia/ New Zealand through a
series of anti-competitive practices, including: unlawfully tying/bundling services in the markets
in which defendants allegedly had monopoly power with services in markets in which ACNielsen
competed with IRI; entering into exclusionary contracts with retailers in certain countries to deny
IRIs access to sales data necessary to provide retail tracking services or to artificially raise
the cost of that data; predatory pricing; acquiring foreign market competitors with the intent of
impeding IRIs efforts to expand; disparaging IRI to financial analysts and clients; and denying
IRI access to capital necessary for it to compete.
IRI is seeking damages in excess of $650 million, which IRI also asked to be trebled. IRI has
filed with the court the report of its expert who has opined that IRI suffered damages of between
$582 million and $652 million from the defendants alleged practices. IRI also sought punitive
damages in an unspecified amount, which the Company believes are precluded as a result of the
dismissal of one of IRIs claims.
On December 3, 2004, the Court entered In limine Order No. 1, which bars IRI from arguing
that Nielsens pricing practices or discounts were illegal or anti-competitive unless it can prove
they involved prices below short-run average variable cost, calculated without the inclusion of
Nielsens Fixed Operations costs. On December 17, 2004, IRI issued a press release, which said,
in relevant part, Without this evidence, IRI believes that little would be left of IRIs case to
take to trial. IRI has asked the Court to enter a final
17
THE DUN & BRADSTREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
judgment against it so that it can take an
immediate appeal to the Second Circuit. The defendants did not object to this request. On February
1, 2005, the Court entered a final judgment dismissing IRIs claims and on February 2, 2005, the
Court entered IRIs notice of appeal to the Court of Appeals for the Second Circuit. The appeal is
fully briefed and argument took place on October 18, 2005.
The Indemnity and Joint Defense Agreement
In connection with the 1996 Distribution, Cognizant (now NMR), ACNielsen and Donnelley/D&B1
entered into an Indemnity and Joint Defense Agreement (the Original JDA), pursuant to which they
agreed to:
|
|
allocate potential liabilities that may relate to, arise out of or result from the IRI
lawsuit (IRI Liabilities); and |
|
|
|
conduct a joint defense of such action. |
VNUs and D&Bs Involvement in the Lawsuit
In 2001, ACNielsen was acquired by VNU. VNU assumed ACNielsens obligations under the Original
JDA.
Under the terms of the 1998 Distribution, D&B2 assumed all potential liabilities of
Donnelley/D&B1 arising from the IRI action and agreed to indemnify Donnelly/D&B1 in connection with
such potential liabilities. Under the terms of the 2000 Distribution, D&B undertook to be jointly
and severally liable with Moodys/D&B2 for D&B2s obligations to Donnelley/D&B1 under the 1998
Distribution, including for any liabilities arising under the Original JDA and arising from the IRI
action itself. However, as between us
and Moodys/D&B2, we agreed that under the 2000 Distribution, each of us and Moodys/D&B2 will
be responsible for 50% of any payments required to be made by Moodys/D&B2 with respect to the IRI
action under the terms of the 1998 Distribution, including legal fees or expenses related to the
IRI action.
The Amended and Restated JDA
On July 30, 2004, the VNU Parties, Donnelley/D&B1, D&B, Moodys/D&B2 and IMS, entered into an
Amended and Restated Indemnity and Joint Defense Agreement (the Amended JDA).
Pursuant to the Amended JDA, any and all IRI Liabilities incurred by Donnelley/D&B1, D&B,
Moodys/D&B2 or IMS relating to a judgment (even if not final) or any settlement being entered into
in the IRI action will be jointly and severally assumed and fully discharged exclusively by the VNU
Parties. Under the Amended JDA, the VNU Parties have agreed to, jointly and severally, indemnify
Donnelley/D&B1, D&B, Moodys/D&B2 and IMS from and against all IRI Liabilities to which they become
subject. As a result, the cap on ACNielsens liability for the IRI Liabilities, which the Original
JDA provided for, no longer exists, and all such liabilities are the responsibility of the VNU
Parties pursuant to the Amended JDA.
In addition, the Amended JDA provides that if it becomes necessary to post any bond pending an
appeal of an adverse judgment, then the VNU Parties shall obtain the bond required for the appeal
and shall pay the full cost of such bond.
In connection with entering into the Amended JDA, Donnelley/D&B1, D&B, Moodys/D&B2 and IMS
agreed to amend certain covenants of the Original JDA to provide operational flexibility for
ACNielsen going forward. In addition, the Amended JDA includes certain amendments to the covenants
of ACNielsen (which, under the Amended JDA, are now also applicable to ACN (US), which we
understand holds ACNielsens operating assets), which are designed to preserve such parties
claim-paying ability and protect Donnelley/ D&B1, D&B, Moodys/D&B2 and IMS. Among other covenants,
ACNielsen and ACN (US) agreed that neither they nor any of their respective subsidiaries will incur
any indebtedness to any affiliated person, except
18
THE DUN & BRADSTREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
indebtedness which its payment will, after a payment obligation under the Amended JDA comes
due, be conditioned on, and subordinated to, the payment and performance of the obligations of such
parties under the Amended JDA. VNU has agreed to have a process agent in New York receive on its
behalf service of any process concerning the Amended JDA.
D&Bs Potential Exposure in the Lawsuit
As described above, the VNU Parties have assumed exclusive responsibility for the payment of
all IRI Liabilities. However, because liability for violations of the antitrust laws is joint and
several and because the rights and obligations relating to the Amended JDA are based on contractual
relationships, the failure of the VNU Parties to fulfill their obligations under the Amended JDA
could result in the other parties bearing all or a share of the IRI Liabilities.
Joint and several liability for the IRI action means that even where more than one defendant
is determined to have been responsible for an alleged wrongdoing, the plaintiff can collect all or
part of the judgment from just one of the defendants. This is true regardless of whatever
contractual allocation of responsibility the defendants and any other indemnifying parties may have
made, including the allocations described above between the VNU Parties, Donnelly/D&B1, D&B,
Moodys/D&B2 and IMS.
Accordingly, and as a result of the allocations of liability described above, in the event the
VNU Parties default on their obligations under the Amended JDA, each of Moodys/D&B2 and D&B will
be responsible for the payment of 50% of the portion of any judgment or settlement ultimately paid
by Donnelley/D&B1 (which is a defendant in the IRI action), which can be as high as all the IRI
Liabilities.
While, as described above, the IRI lawsuit has been dismissed, IRI has filed an appeal.
Accordingly, we are unable to predict the outcome of the IRI action (including the appeal) or the
financial condition of any of the VNU Parties or the other defendants at the time of any such
outcome (and hence we cannot estimate their ability to pay the IRI Liabilities pursuant to the
Amended JDA or the judgment or settlement in the IRI action). However, provided that the VNU
Parties fulfill their obligations under the Amended JDA, we believe that the resolution of this
matter would not materially affect our results of operations, cash flows and financial position.
Accordingly, no amount in respect of this matter has been accrued in our consolidated financial
statements. If, however, IRI were to prevail in whole or in part in this action and if D&B is
required to pay, notwithstanding such contractual obligations, a portion of any significant
settlement or judgment, the outcome of this matter could have a material adverse effect on D&Bs
financial position, results of operations and cash flows.
Hoovers Initial Public Offering Litigation
On November 15, 2001, a putative shareholder class action lawsuit was filed against Hoovers,
certain of its then current and former officers and directors (the Individual Defendants), and
one of the investment banks that was an underwriter of Hoovers July 1999 initial public offering
(IPO). The lawsuit was filed in the United States District Court for the Southern District of New
York and purports to be a class action filed on behalf of purchasers of the stock of Hoovers
during the period from July 20, 1999 through December 6, 2000.
A Consolidated Amended Complaint, which is now the operative complaint, was filed on April 19,
2002. The purported class action alleges violations of Sections 11 and 15 of the Securities Act of
1933, as amended, (the 1933 Act) and Sections 10(b), Rule 10b-5 and 20(a) of the Securities
Exchange Act of 1934, as amended, against Hoovers and Individual Defendants. Plaintiffs allege
that the underwriter defendant agreed to allocate stock in Hoovers IPO to certain investors in
exchange for excessive and undisclosed commissions and agreements by those investors to make
additional purchases of stock in the aftermarket at predetermined prices above the IPO price.
Plaintiffs allege that the Prospectus for Hoovers IPO was false and misleading in
19
THE DUN & BRADSTREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
violation of the
securities laws because it did not disclose these arrangements. The action seeks damages in an
unspecified amount. The defense of the action is being coordinated with more than 300 other nearly
identical actions filed against other companies. On July 15, 2002, Hoovers moved to dismiss all
claims against it and the Individual Defendants. On October 9, 2002, the Court dismissed the
Individual Defendants from the case based upon Stipulations of Dismissal filed by the plaintiffs
and the Individual Defendants. On February 19, 2003, the Court denied the motion to dismiss the
complaint against Hoovers. On October 13, 2004, the Court certified a class in six of the
approximately 300 other nearly identical actions and noted that the decision is intended to provide
strong guidance to all parties regarding class certification in the remaining cases. Plaintiffs
have not yet moved to certify a class in the case involving Hoovers.
Hoovers has approved a settlement agreement and related agreements that set forth the terms
of a settlement between Hoovers, the plaintiff class and the vast majority of the other
approximately 300 issuer defendants. Among other provisions, the settlement provides for a release
of Hoovers and the individual defendants for the conduct alleged in the action to be wrongful.
Hoovers would agree to undertake certain responsibilities, including agreeing to assign away, not assert, or
release certain potential claims Hoovers may have against its underwriters. The settlement
agreement also provides a guaranteed recovery of $1 billion to plaintiffs for the cases relating to
all of the approximately 300 issuers. To the extent that the underwriter defendants settle all of
the cases for at least $1 billion, no payment will be required under the issuers settlement
agreement. To the extent that the underwriter defendants settle for less than $1 billion, the
issuers are required to make up the difference. It is anticipated that any potential financial
obligation of Hoovers to plaintiffs pursuant to the terms of the settlement agreement and related
agreements will be covered by existing insurance. Hoovers currently is not aware of any material
limitations on the expected recovery of any potential financial obligation to plaintiffs from its
insurance carriers. Its carriers are solvent, and Hoovers is not aware of any uncertainties as to
the legal sufficiency of an insurance claim with respect to any recovery by plaintiffs. Therefore,
we do not expect that the settlement will involve any payment by Hoovers. If material limitations
on the expected recovery of any potential financial obligation to the plaintiffs from Hoovers
insurance carriers should arise, Hoovers maximum financial obligation to plaintiffs pursuant to
the settlement agreement is less than $3.4 million. On February 15, 2005, the court granted
preliminary approval of the settlement agreement, subject to certain modifications consistent with
its opinion. Those modifications have been made. There is no assurance that the court will grant
final approval to the settlement.
As previously noted, if the settlement is ultimately approved and implemented in its current
form, Hoovers reasonably foreseeable exposure in this matter, if any, would be limited to amounts
that would be covered by existing insurance. If the settlement is not approved in its current form,
we cannot predict the final outcome of this matter or whether such outcome or ultimate resolution
of this matter could materially affect our results of operations, cash flows or financial position.
No amount in respect of any potential judgment in this matter has been accrued in our consolidated
financial statements.
Pension Plan Litigation
March 2003 Action
In March 2003, a lawsuit seeking class action status was filed against us in federal court in
Connecticut on behalf of 46 specified former employees relating to our retirement plans. As noted
below, during the fourth quarter of 2004 most of the counts in the complaint were dismissed. The
complaint, as amended in July 2003 (the Amended Complaint), sets forth the following putative
class:
|
|
|
current D&B employees who are participants in The Dun & Bradstreet Corporation Retirement
Account and were previously participants in its predecessor plan, The Dun & Bradstreet
Master Retirement Plan; |
20
THE DUN & BRADSTREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
|
|
|
current employees of Receivable Management Services Corporation (RMSC) who are
participants in The Dun & Bradstreet Corporation Retirement Account and were previously
participants in its predecessor plan, The Dun & Bradstreet Master Retirement Plan; |
|
|
|
|
former employees of D&B or D&Bs Receivable Management Services (RMS) operations who
received a deferred vested retirement benefit under either The Dun & Bradstreet Corporation
Retirement Account or The Dun & Bradstreet Master Retirement Plan; and |
|
|
|
|
former employees of D&Bs RMS operations whose employment with D&B terminated after the
sale of the RMS operations but who are not employees of RMSC and who, during their
employment with D&B, were Eligible Employees for purposes of The Dun & Bradstreet Career
Transition Plan. |
The Amended Complaint estimates that the proposed class covers over 5,000 individuals.
There are four counts in the Amended Complaint. Count 1 claims that we violated ERISA by not
paying severance benefits to plaintiffs under our Career Transition Plan. Count 2 claims a
violation of ERISA in that our sale of the RMS business to RMSC and the resulting termination of
our employees constituted a prohibited discharge of the plaintiffs and/or discrimination against
the plaintiffs for the intentional purpose of interfering with their employment and/or attainment
of employee benefit rights which they might otherwise have attained. Count 3 claims that the
plaintiffs were materially harmed by our alleged violation of ERISAs requirements that a summary
plan description reasonably apprise participants and beneficiaries of their rights and obligations
under the plans and that, therefore, undisclosed plan provisions (in this case, the actuarial
deduction beneficiaries incur when they leave D&B before age 55 and elect to retire early) cannot
be enforced against them. Count 4 claims that the 6.60% interest rate (the rate is actually 6.75%)
used to actuarially reduce early retirement benefits is unreasonable and, therefore, results in a
prohibited forfeiture of benefits under ERISA.
In the Amended Complaint, the plaintiffs sought payment of severance benefits; equitable
relief in the form of either reinstatement of employment with D&B or restoration of employee
benefits (including stock options); invalidation of the actuarial reductions applied to deferred
vested early retirement benefits, including invalidation of the plan rate of 6.60% (the actual rate
is 6.75%) used to actuarially reduce former employees early retirement benefits; attorneys fees
and such other relief as the court may deem just.
We deny all allegations of wrongdoing and are aggressively defending the case. In September
2003, we filed a motion to dismiss Counts 1, 3 and 4 of the Amended Complaint on the ground that
plaintiffs cannot prevail on those claims under any set of facts, and in February 2004, the Court
heard oral argument on our motion. With respect to Count 4, the court requested that the parties
conduct limited expert discovery and submit further briefing. In November 2004, after completion of
expert discovery on Count 4, we moved for summary judgment on Count 4 on the ground that an
interest rate of 6.75% is reasonable as a matter of law. On November 30, 2004 the Court issued a
ruling granting our motion to dismiss Counts 1 and 3. Shortly after that ruling, plaintiffs
counsel stipulated to dismiss with prejudice Count 2 (which challenged the sale of the RMS business
as an intentional interference with employee benefit rights, but which the motion to dismiss did
not address). Plaintiffs counsel also stipulated to a dismissal with prejudice of Count 1, the
severance pay claim, agreeing to forego any appeal of the Courts dismissal of that claim.
Plaintiffs counsel did file a motion to join party plaintiffs and to amend the amended complaint
to add a new count challenging the adequacy of the retirement plans mortality tables. The court
granted the motion and we filed our objections. On June 6, 2005, the court granted D&Bs motion for
summary judgment as to Count 4 (the interest rate issue) and also denied the plaintiffs motion to
further amend the Complaint to add a new claim challenging the mortality tables. On July 8, 2005,
the plaintiffs filed their notice of appeal; they are appealing the ruling granting the motion to
dismiss, the ruling granting summary judgment, and the denial of leave to amend their complaint.
While we believe we have strong defenses in this matter, we are unable to predict at this time
the final outcome of this matter or whether the resolution of this matter could materially affect
our results of
21
THE DUN & BRADSTREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
operations, cash flows or financial position. No amount in respect of this matter
has been accrued in our consolidated financial statements.
September 2005 Action
In addition to the foregoing proceeding, a lawsuit seeking class action status was filed in
September of 2005 against us in federal court in the Northern District of Illinois on behalf of a
current employee relating to our retirement plans. The complaint (the Complaint), seeks
certification of the following putative class: current or former D&B employees (other than employees who on December 31, 2001 (i) were
at least age 50 with 10 years of vesting service, (ii) had attained an age which, when added
to his or her years of Vesting Service, was equal to or greater than 70; or (iii) had
attained age 65), who participated in The Dun & Bradstreet Master Retirement Plan before
January 1, 2002 and who have participated in The Dun & Bradstreet Corporation Retirement
Account at any time since January 1, 2002.
The Complaint estimates that the proposed class covers over 1,000 individuals.
There are five counts in the Complaint. Count 1 claims that we violated ERISA by reducing the
rate of an employees benefit accrual on the basis of age. Count 2 claims a violation of ERISAs
non-forfeitability requirement, because the plan allegedly conditions receipt of cash balance
benefits on foregoing the early retirement benefits plaintiff earned prior to the adoption of the
cash balance amendment. Count 3 claims that the cash balance plan violates ERISAs
anti-backloading rule. Count 4 claims that D&B failed to supply advance notice of a significant
benefit decrease. Count 5 claims that D&B failed to provide an
adequate Summary Plan Description.
In the Complaint, the plaintiff seeks (1) a declaration that (a) D&Bs cash balance plan is
ineffective and that the D&B Master Retirement Plan is still in force and effect, and (b)
plaintiffs benefit accrual under the cash balance plan must be unconditional and not reduced
because of age, (2) an injunction (a) prohibiting the application of the cash balance plans
reduction in the rate of benefit accruals because of age and its conditions of benefits due under
the plan, and (b) ordering appropriate equitable relief to determine plan participant losses caused
by D&Bs payment of benefits under the cash balance plans terms and requiring the payment of
additional benefits as appropriate, (3) attorneys fees and costs, (4) interest, and (5) such other
relief as the court may deem just.
We believe we have strong defenses in this matter and we will deny all allegations of
wrongdoing and aggressively defend the case.
We are unable to predict at this time the final outcome of this matter or whether the
resolution of this matter could materially affect
our results of operations, cash flows or financial position. No amount in respect of this
matter has been accrued in our consolidated financial statements.
Additional Matters
Base DInformations Legales Holding S.A.S.
As previously discussed in our Quarterly Report on Form 10-Q for the quarterly period ended
June 30, 2005, in May 2005, we were contacted by Base DInformations Legales Holding S.A.S. (BIL
Holding), the purchaser of our French operations in October 2004, regarding allegations of
improper sales related activities involving those operations (the Alleged Conduct). Based on our
investigation into the Alleged Conduct, including reviewing evidence that BIL Holding made
available, we have concluded that the evidence presented is insufficient to substantiate the
Alleged Conduct and BIL has withdrawn its allegations. The Company and BIL have reached a final
resolution of this matter. See Managements Discussion and Analysis of Financial Condition and
Results of Operations Segment Results International Operating Income and Non-Core
Gains and (Charges) in Part I, Item 2 of this Quarterly Report on Form 10-Q for
22
THE DUN & BRADSTREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
additional
information regarding legal expenses incurred in connection with investigating and resolving this
matter and costs incurred to resolve this matter, respectively.
Other
In addition, in the normal course of business, D&B indemnifies other parties, including
customers, lessors and parties to other transactions with D&B, with respect to certain matters. D&B
has agreed to hold the other parties harmless against losses arising from a breach of
representations or covenants, or out of other claims made against certain parties. These agreements
may limit the time within which an indemnification claim can be made and the amount of the claim.
D&B has also entered into indemnity obligations with its officers and directors of the Company.
Additionally, in certain circumstances, D&B issues guarantee letters on behalf of our wholly owned
subsidiaries for specific situations. It is not possible to determine the maximum potential amount
of future payments under these indemnification agreements due to the limited history of prior
indemnification claims and the unique facts and circumstances involved in each particular
agreement. Historically, payments made by D&B under these agreements have not had a material impact
on our consolidated financial statements.
Note 9 Divestitures
During April 2005, we sold our equity investment in a South African company. We received
proceeds of $5.3 million and recognized a pre-tax gain of approximately $3.5 million in the second
quarter of 2005.
On May 10, 2004, we sold our operations in Germany, Austria, Switzerland, Poland, Hungary and
the Czech Republic (Central European Operations) to Bonnier Affarsinformation AB (Bonnier) for
$25.7 million, consisting of $18.1 million in cash and $7.6 million in other receivables, of which
$5.6 million has been collected in 2004. We recognized a pre-tax gain of $5.6 million in the second
quarter of 2004 in Other Income (Expense) Net. Our Central European Operations generated
approximately $52 million in revenue in 2003.
On February 29, 2004, we sold our operations in India and our Distribution Channels in
Pakistan and the Middle East for $7.7 million. We received proceeds of $7.3 million (net of
withholding tax), consisting of cash of $6.5 million and an investment of $0.8 million representing
a 10% interest in the newly formed entity. We recognized a pre-tax gain of $3.8 million in Other
Income (Expense) Net in the first quarter of 2004. In 2003, revenue generated from these
operations and distribution channels were approximately $6.4 million.
On December 1, 2003, we sold our operations in Sweden, Denmark, Norway, and Finland (Nordic
operations) to Bonnier, for $42.7 million. The proceeds consisted of cash of $35.9 million, notes
receivable of $5.9 million and another receivable of $0.9 million. As a result of our International
segment November 30 fiscal year end, we recognized a pre-tax gain of $7.9 million in Other Income
(Expense) Net in the first quarter of 2004. Additionally, we wrote-off the $0.9 million other
receivable in the second quarter of 2004. Our Nordic operations generated approximately $50.9
million of revenue in 2003.
As part of the 2004 divestitures noted above, we established a strategic relationship in each
of these countries where the buyer operates the acquired businesses under the D&B name, continues
to distribute D&B-branded products and services, and provides D&B with data to support our global
customer needs. All these divestitures were part of our International Segment.
Note 10 Stock-Based Compensation
We have stock-based compensation plans accounted for under the recognition and measurement
principles of APB Opinion No. 25, Accounting for Stock Issued to Employees, and related
interpretations. Accordingly, no stock-based employee compensation cost is reflected in net income
for our outstanding stock options as all options granted under our plans had an exercise price
equal to the market value of the underlying
23
THE DUN & BRADSTREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
common stock on the date of grant. Also, no stock-based
compensation cost is reflected in our net income for our Employee Stock Purchase Plan. The costs
associated with our restricted stock grants, stock appreciation rights and restricted stock units
are included in net income.
The following table summarizes the pro forma effect of stock-based compensation on net income
and net income per share as if the fair value expense recognition provisions of SFAS No. 123,
Accounting for Stock-Based Compensation, as amended by SFAS No. 148, Accounting for Stock-Based
Compensation Transition and Disclosure, had been adopted.
|
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|
|
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|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
Reported Net Income |
|
$ |
31.7 |
|
|
$ |
47.5 |
|
|
$ |
130.9 |
|
|
$ |
136.8 |
|
Add: Stock compensation cost under the intrinsic
method, included in net income, net of tax
benefits |
|
|
1.5 |
|
|
|
1.4 |
|
|
|
5.7 |
|
|
|
4.0 |
|
Deduct: Total stock compensation cost under
fair-value method for all awards, net of tax
benefits |
|
|
(4.0 |
) |
|
|
(4.3 |
) |
|
|
(13.9 |
) |
|
|
(12.4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma Net Income |
|
$ |
29.2 |
|
|
$ |
44.6 |
|
|
$ |
122.7 |
|
|
$ |
128.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic EPS: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As reported |
|
$ |
0.48 |
|
|
$ |
0.68 |
|
|
$ |
1.95 |
|
|
$ |
1.93 |
|
Pro forma |
|
$ |
0.44 |
|
|
$ |
0.64 |
|
|
$ |
1.83 |
|
|
$ |
1.81 |
|
Diluted EPS: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As reported |
|
$ |
0.46 |
|
|
$ |
0.65 |
|
|
$ |
1.87 |
|
|
$ |
1.86 |
|
Pro forma |
|
$ |
0.42 |
|
|
$ |
0.61 |
|
|
$ |
1.76 |
|
|
$ |
1.74 |
|
Note 11 Pension and Post-retirement Benefits
The following table sets forth the components of the net periodic cost associated with our
pension plans and our post-retirement benefit obligations, pursuant to the requirements under SFAS
No. 132 (revised).
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Pension Plans |
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Post-retirement Benefits |
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For Three |
|
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For Nine |
|
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For Three |
|
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For Nine |
|
|
|
Months Ended |
|
|
Months Ended |
|
|
Months Ended |
|
|
Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
September 30, |
|
|
September 30, |
|
|
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
Service cost |
|
$ |
1.8 |
|
|
$ |
3.5 |
|
|
$ |
12.2 |
|
|
$ |
10.9 |
|
|
$ |
0.3 |
|
|
$ |
(0.1 |
) |
|
$ |
0.9 |
|
|
$ |
0.6 |
|
Interest cost |
|
|
4.7 |
|
|
|
21.3 |
|
|
|
64.2 |
|
|
|
63.5 |
|
|
|
1.2 |
|
|
|
0.3 |
|
|
|
3.6 |
|
|
|
5.7 |
|
Expected
return on plan
assets |
|
|
(4.4 |
) |
|
|
(31.0 |
) |
|
|
(87.4 |
) |
|
|
(94.6 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization
of prior
service cost |
|
|
0.4 |
|
|
|
0.7 |
|
|
|
2.3 |
|
|
|
2.1 |
|
|
|
(2.5 |
) |
|
|
(1.2 |
) |
|
|
(8.0 |
) |
|
|
(8.6 |
) |
Recognized actuarial (gains) loss |
|
|
1.8 |
|
|
|
2.1 |
|
|
|
16.0 |
|
|
|
6.6 |
|
|
|
(0.3 |
) |
|
|
(2.3 |
) |
|
|
(0.8 |
) |
|
|
|
|
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|
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|
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|
|
|
|
|
|
|
|
Net periodic (income) cost |
|
$ |
4.3 |
|
|
$ |
(3.4 |
) |
|
$ |
7.3 |
|
|
$ |
(11.5 |
) |
|
$ |
(1.3 |
) |
|
$ |
(3.3 |
) |
|
$ |
(4.3 |
) |
|
$ |
(2.3 |
) |
|
|
|
|
|
|
|
|
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|
We previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2004
that we expected to contribute $26.4 million and $16.0 million to our pension plans and
post-retirement benefit plan, respectively, in 2005. As of September 30, 2005, we have made
contributions to our pension plans and post-retirement plans of $22.3 million and $10.4 million,
respectively.
On January 21, 2005, the Centers for Medicare and Medicaid Services (CMS) released final
regulations implementing major provisions of the Medicare Prescription Drug, Improvement, and
Moderniza-
24
THE DUN & BRADSTREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
tion Act of 2003. The regulations address key concepts, such as defining a plan, as well
as the actuarial equivalence test for purposes of obtaining a government subsidy. Pursuant to the
guidance in FSP No. FAS 106-2, we have assessed the financial impact of the regulations and
concluded that our post-retirement benefit plan will be qualified for the direct subsidies for an
additional seven years and our APBO is expected to decrease by an approximately additional $4.8
million, reflecting the updated demographics of the plan population. As a result, our 2005 post-
retirement benefit cost is expected to decrease by approximately $0.7 million. Together with
the impacts already included in our December 31, 2004 results, the APBO decreased by a total of
$35.8 million and our plan is expected to be actuarially equivalent in 2006 until 2023.
We incurred a curtailment charge of $0.3 million for our U.K. Pension Plan in the second
quarter of 2005 and $0.1 million for the U.S. Qualified Plan in the third quarter of 2005 related
to the 2005 Financial Flexibility Program (see detail in Note 3 Impact of Implementation of the
Blueprint for Growth Strategy). In addition, we recognized a curtailment gain of $0.1 million and
$5.8 million for our post-retirement benefit plan for the three month and nine month periods ended
September 30, 2005, respectively, related to the 2004 Financial Flexibility Program (see detail in
Note 3 Impact of Implementation of the Blueprint for Growth Strategy).
Note 12 Segment Information
The operating segments reported below are our segments for which separate financial
information is available and upon which operating results are evaluated by management on a timely
basis to assess performance and to allocate resources. On January 1, 2005, we began managing our
operations in Canada as part of our International segment. As part of this change, our results are
reported under the following two segments: United States (U.S.) and International. We have
conformed historical amounts to reflect the new segment structure. Our customer solution sets are
Risk Management Solutions, Sales & Marketing Solutions, E-Business Solutions and Supply Management
Solutions. Inter-segment sales are immaterial and no single customer accounted for 10% or more of
our total revenues. For management reporting purposes, we evaluate business segment performance
before restructuring charges because restructuring charges are not a component of our ongoing
income or expenses and may have a disproportionate positive or negative impact on the results of
our ongoing underlying business (see Item 2. Managements Discussion and Analysis of Financial
Condition and Results of Operations, under the heading How We Evaluate Performance for further
details). Additionally, transition costs, which are period costs such as consulting fees, costs of
temporary
25
THE DUN & BRADSTREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
employees, relocation costs and stay bonuses incurred to implement our Financial
Flexibility Program, are not allocated to our business segments.
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|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
Operating Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. |
|
$ |
259.0 |
|
|
$ |
240.2 |
|
|
$ |
775.9 |
|
|
$ |
718.5 |
|
International |
|
|
82.6 |
|
|
|
93.0 |
|
|
|
258.7 |
|
|
|
308.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated Total |
|
$ |
341.6 |
|
|
$ |
333.2 |
|
|
$ |
1,034.6 |
|
|
$ |
1,026.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income (Loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. |
|
$ |
87.3 |
|
|
$ |
81.0 |
|
|
$ |
267.7 |
|
|
$ |
236.5 |
|
International |
|
|
13.1 |
|
|
|
13.5 |
|
|
|
35.5 |
|
|
|
45.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Divisions |
|
|
100.4 |
|
|
|
94.5 |
|
|
|
303.2 |
|
|
|
282.3 |
|
Corporate and Other(1) |
|
|
(21.2 |
) |
|
|
(21.6 |
) |
|
|
(75.8 |
) |
|
|
(79.3 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated Total |
|
|
79.2 |
|
|
|
72.9 |
|
|
|
227.4 |
|
|
|
203.0 |
|
Non-Operating Income (Expense) Net |
|
|
(6.1 |
) |
|
|
(0.5 |
) |
|
|
(7.0 |
) |
|
|
10.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before Provision for Income
Taxes |
|
$ |
73.1 |
|
|
$ |
72.4 |
|
|
$ |
220.4 |
|
|
$ |
213.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
(1) The following table itemizes Corporate and
Other
Corporate Costs |
|
$ |
(12.3 |
) |
|
$ |
(14.9 |
) |
|
$ |
(36.1 |
) |
|
$ |
(44.3 |
) |
Transition Costs (costs to implement our Financial
Flexibility Program) |
|
|
(4.2 |
) |
|
|
(4.0 |
) |
|
|
(18.1 |
) |
|
|
(14.1 |
) |
Restructuring Charge |
|
|
(4.7 |
) |
|
|
(2.7 |
) |
|
|
(21.6 |
) |
|
|
(20.9 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Corporate and Other |
|
$ |
(21.2 |
) |
|
$ |
(21.6 |
) |
|
$ |
(75.8 |
) |
|
$ |
(79.3 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
26
THE DUN & BRADSTREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
Supplemental Geographic and Customer Solution Set Information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months |
|
|
Nine Months |
|
|
|
Ended |
|
|
Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
Customer Solution Set Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk Management Solutions |
|
$ |
160.7 |
|
|
$ |
149.4 |
|
|
$ |
490.7 |
|
|
$ |
459.3 |
|
Sales & Marketing Solutions |
|
|
72.1 |
|
|
|
70.5 |
|
|
|
216.3 |
|
|
|
204.0 |
|
E-Business Solutions |
|
|
17.0 |
|
|
|
12.9 |
|
|
|
48.3 |
|
|
|
36.0 |
|
Supply Management Solutions |
|
|
9.2 |
|
|
|
7.4 |
|
|
|
20.6 |
|
|
|
19.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total U.S. |
|
|
259.0 |
|
|
|
240.2 |
|
|
|
775.9 |
|
|
|
718.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
International: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk Management Solutions |
|
|
68.9 |
|
|
|
65.9 |
|
|
|
219.0 |
|
|
|
194.5 |
|
Sales & Marketing Solutions |
|
|
12.0 |
|
|
|
11.9 |
|
|
|
34.9 |
|
|
|
37.0 |
|
E-Business Solutions |
|
|
0.9 |
|
|
|
|
|
|
|
1.9 |
|
|
|
|
|
Supply Management Solutions |
|
|
0.8 |
|
|
|
0.9 |
|
|
|
2.9 |
|
|
|
2.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Core Revenue |
|
|
82.6 |
|
|
|
78.7 |
|
|
|
258.7 |
|
|
|
234.3 |
|
Divested Businesses |
|
|
|
|
|
|
14.3 |
|
|
|
|
|
|
|
73.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total International |
|
|
82.6 |
|
|
|
93.0 |
|
|
|
258.7 |
|
|
|
308.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated Total: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk Management Solutions |
|
|
229.6 |
|
|
|
215.3 |
|
|
|
709.7 |
|
|
|
653.8 |
|
Sales & Marketing Solutions |
|
|
84.1 |
|
|
|
82.4 |
|
|
|
251.2 |
|
|
|
241.0 |
|
E-Business Solutions |
|
|
17.9 |
|
|
|
12.9 |
|
|
|
50.2 |
|
|
|
36.0 |
|
Supply Management Solutions |
|
|
10.0 |
|
|
|
8.3 |
|
|
|
23.5 |
|
|
|
22.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated Core Revenue |
|
|
341.6 |
|
|
|
318.9 |
|
|
|
1,034.6 |
|
|
|
952.8 |
|
Divested Businesses |
|
|
|
|
|
|
14.3 |
|
|
|
|
|
|
|
73.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated Total |
|
$ |
341.6 |
|
|
$ |
333.2 |
|
|
$ |
1,034.6 |
|
|
$ |
1,026.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2005 |
|
|
2004 |
|
Assets: |
|
|
|
|
|
|
|
|
U.S. |
|
$ |
394.8 |
|
|
$ |
423.3 |
|
International |
|
|
454.3 |
|
|
|
499.5 |
|
|
|
|
|
|
|
|
Total Divisions |
|
|
849.1 |
|
|
|
922.8 |
|
Corporate and Other (primarily domestic pensions and
taxes) |
|
|
652.3 |
|
|
|
712.7 |
|
|
|
|
|
|
|
|
Total Assets |
|
$ |
1,501.4 |
|
|
$ |
1,635.5 |
|
|
|
|
|
|
|
|
27
THE DUN & BRADSTREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2005 |
|
|
2004 |
|
Goodwill: |
|
|
|
|
|
|
|
|
U.S.(1) |
|
$ |
122.7 |
|
|
$ |
110.9 |
|
International |
|
|
100.2 |
|
|
|
106.1 |
|
|
|
|
|
|
|
|
Total Goodwill |
|
$ |
222.9 |
|
|
$ |
217.0 |
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The increase in goodwill in the U.S. from $110.9 million at December 31, 2004 to $122.7
million at September 30, 2005 is attributed to the acquisition of LiveCapital, Inc. in the
third quarter of 2005 (see Note 4 Acquisitions for more detail). |
Note 13 Income Taxes
During the quarter ended September 30, 2005, we recorded an $8.6 million increase in equity
for the current period realization of income tax benefits arising from certain prior year stock
option exercises.
For the three months ended September 30, 2005, our effective tax rate was 57.1%, as compared
to 34.8% for the three months ended September 30, 2004. The effective tax rate for the three months
ended September 30, 2005 was negatively impacted by 12.4 points for the tax associated with the
adoption of FSP No. FAS 109-2 (see Note 2 Recent Accounting Pronouncements for additional
information) relating to foreign cash repatriation, by 8.6 points resulting from an increase in our
tax legacy reserve for Royalty Expense Deductions 1993-1997 (see Note 8 Contingencies (Tax
Matters) for additional information), by 1.0 point resulting from the non-deductibility in some
countries of certain items included within the restructuring charge and positively impacted by 3.2
points for the interest benefit on a carry back claim and tax credit refunds. The effective tax
rate for the three months ended September 30, 2004 had been positively impacted by 2.1 points for
tax benefits related to the sale of our operation in Iberia and by 1.4 points for global tax
planning initiatives.
For the nine months ended September 30, 2005, our effective tax rate was 40.9% as compared to
36.2% for the nine months ended September 30, 2004. The effective tax rate for the nine months
ended September 30, 2005 was negatively impacted by 4.1 points for the tax associated with the
adoption of FSP No. FAS 109-2 (see Note 2 Recent Accounting Pronouncements for additional
information) relating to foreign cash repatriation, by 2.8 points resulting from an increase in our
tax legacy reserve for Royalty Expense Deductions 1993-1997 (see Note 8 Contingencies (Tax
Matters) for additional information) and by 1.2 points resulting from the non-deductibility in some
countries of certain items included within the restructuring charge and positively impacted by 4.1
points for a tax deduction related to the liquidation of dormant entities that remained after the
sale of our operations in the Nordic region (Sweden, Denmark, Norway, and Finland) and by 1.0 point
for the interest benefit on a carry back claim and tax credit refunds. The effective tax rate for
the nine months ended September 30, 2004 had been positively impacted by 1.1 points for tax
benefits related to the sales of our operations in Central Europe, Iberia, India and Nordic region
and positively impacted by 0.6 points for global tax planning initiatives.
Note 14 Subsequent Events
In connection with the Medicare Prescription Drug, Improvement, and Modernization Act of 2003,
we will share 25% of the projected federal subsidies with the retirees starting in fiscal year
2006. In the future, we may consider increasing our sharing percentage as necessary in order to
ensure our retiree prescription drug plan remains actuarially equivalent and continues to qualify
for federal subsidies. The sharing strategy has been communicated to
our retirees in October 2005 and we
will account for the impact in accordance with FSP No. FAS 106-2. As a result, our APBO will
increase by approximately $2 million and our annual post-retirement benefit income will decrease by
approximately $1 million.
28
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations.
Business Overview
We are the leading provider of global business information, tools and insight, and have
enabled customers to Decide with ConfidenceTM for over 160 years. Our propriety DUNSRightTM
quality process provides customers with quality business information. This quality information is
the foundation of our solutions that customers rely on to make critical business decisions.
Customers use our Risk Management SolutionsTM to mitigate credit risk, increase cash flow and
drive increased profitability, our Sales & Marketing SolutionsTM to increase revenue from new and
existing customers, our E-Business SolutionsTM to convert prospects to clients faster and our
Supply Management SolutionsTM to increase cash by generating ongoing savings from our customers
suppliers and protecting our customers from serious financial, operational and regulatory risk.
The financial statements of the subsidiaries included in our International segment, except for
our Canadian region, reflect a quarter ended August 31, 2005, in order to facilitate timely
reporting of our consolidated financial results and financial position.
How We Evaluate Performance
For internal management purposes, we use total revenue excluding the revenue of divested
businesses, which we refer to as core revenue, to manage and evaluate the performance of our
business segments and to allocate resources, because this measure provides an indication of the
underlying direction of changes in revenue in a single performance measure without reported revenue
of international divested businesses which will not be included in future revenue. Core revenue
also includes the revenue from acquired businesses from the date of acquisition. International
divested business revenue for the three month and nine month periods ended September 30, 2004
included in this Form 10-Q includes the revenue from our operations in:
|
|
|
the Nordic region (Sweden, Denmark, Norway and Finland, all sold in the first quarter of
2004); |
|
|
|
|
India and Distribution Channels in Pakistan and the Middle East (all sold in the first
quarter of 2004); |
|
|
|
|
Central Europe (Germany, Austria, Switzerland, Poland, Hungary and the Czech Republic,
all sold in the second quarter of 2004); |
|
|
|
|
Iberia (Spain and Portugal, both sold in the fourth quarter of 2004); and |
|
|
|
|
France (sold in the fourth quarter of 2004). |
Management believes that core revenue provides valuable insight into our revenue from ongoing
operations and enables investors to evaluate business performance and trends by facilitating a
comparison of results of ongoing operations with prior period financial results.
We also isolate the effects of changes in foreign exchange rates on our revenue growth
because, while we take steps to manage our exposure to foreign currency, we believe it is useful
for investors to be able to compare revenue from one period to another, both with and without the
effects of foreign exchange. As a result, we monitor our core revenue growth both after and before
the effects of foreign exchange. Core revenue growth excluding the effects of foreign exchange is
referred to as core revenue growth before the effects of foreign exchange. We also separately
analyze core revenue growth before the effects of foreign exchange among two components, organic
core revenue growth and core revenue growth from acquisitions. We analyze organic core revenue
growth and core revenue growth from acquisitions because management believes this information
provides an important insight into the underlying health of our business.
We evaluate the performance of our business segments based on segment revenue growth before
the effects of foreign exchange, and segment operating income growth before certain types of gains
and (charges) that we believe do not reflect our underlying business performance. Specifically, for
management reporting purposes, we evaluate business segment performance before non-core gains and
(charges) such as restructuring charges because they are not a component of our ongoing income or
expenses and/or may have a disproportionate positive or negative impact on the results of our
ongoing underlying business operations. For the three months ended September 30, 2005, net pre-tax
non-core gains and (charges) included restructuring
29
charges of $4.7 million, and charges totaling
$2.2 million related to the final resolution of all disputes on the sale of the Companys French
business (see Note 8
Contingencies (Additional Matters) to the unaudited consolidated financial statements to this
Form 10-Q for additional information related to this dispute). For the three months ended September
30, 2005, unrelated non-core charges for taxes included a $9.1 million charge related to the
adoption of Financial Accounting Standards Board (FASB) Staff Position (FSP) No. FAS 109-2,
Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provision within the
American Jobs Creation Act of 2004 (see Note 2 Recent Accounting Pronouncements to the
unaudited consolidated financial statements to this Form 10-Q for additional information) and a
$6.3 million charge resulting from an increase in our tax legacy reserve for Royalty Expense
Deductions 1993-1997 (see Note 8 Contingencies (Tax Matters) to the unaudited consolidated
financial statements to this Form 10-Q for additional information). For the three months ended
September 30, 2004, non-core gains and (charges) were restructuring charges of $2.7 million and a
reduction of $0.8 million for the second quarter of 2004 impairment charge to reflect the fair
market value of the net assets of our Iberian operations as of the end of the third quarter of
2004.
For the nine months ended September 30, 2005, net pre-tax non-core gains and (charges) were
restructuring charges of $21.6 million, and charges totaling $4.1 million related to the final
resolution of all disputes on the sale of the Companys French business, partially offset by a gain
of $3.5 million related to the sale of a 5% investment in a South African company and an $0.8
million related to lower than expected costs related to the sale of the Companys Iberian business.
For the nine months ended September 30, 2005, unrelated non-core charges for taxes included a $9.1
million charge related to the adoption of Financial Accounting Standards Board (FASB) Staff
Position (FSP) No. FAS 109-2, Accounting and Disclosure Guidance for the Foreign Earnings
Repatriation Provision within the American Jobs Creation Act of 2004 and a $6.3 million charge
resulting from an increase in our tax legacy reserve for Royalty Expense Deductions 1993-1997,
partially offset by tax benefits of $9.0 million recognized upon the liquidation of dormant
international entities whose assets were divested as part of our International market leadership
strategy. For the nine months ended September 30, 2004, non-core gains and (charges) were
restructuring charges of $20.9 million, and an impairment charge of $0.4 million to write-down the
net assets of our Iberian operations to fair market value, offset by gains on the sales of our
operations in the Nordic region of $7.9 million, India, and distribution channels in Pakistan and
the Middle East of $3.8 million, and in Central Europe of $5.6 million. Additionally, transition
costs (period costs such as consulting fees, costs of temporary employees, relocation costs and
stay bonuses incurred to implement the Financial Flexibility component of our strategy) are
reported as Corporate and Other expenses and are not allocated to our business segments.
Transition costs were $4.2 million and $4.0 million for the three months ended September 30, 2005
and 2004, respectively. Transition costs were $18.1 million and $14.1 million for the nine months
ended September 30, 2005 and 2004, respectively.
Similarly, when we evaluate the performance of our business as a whole, we focus on results
(such as operating income, operating income growth, operating margin, net income, tax rate and
diluted earnings per share) before non-core gains and (charges) because such non-core gains and
(charges) are not a component of our ongoing income or expenses and/or may have a disproportionate
positive or negative impact on the results of our ongoing underlying business operations. It should
not be concluded from our presentation of non-core gains and (charges) that the items that result
in non-core gains and (charges) will not occur in the future.
Another component of how we manage our business is free cash flow. We define free cash flow
as net cash provided by operating activities minus capital expenditures and minus additions to
computer software and other intangibles. Free cash flow measures our available cash flow for
potential debt repayment, acquisitions, stock repurchases and additions to cash, cash equivalents
and short term investments. We believe free cash flow to be relevant and useful to our investors as
this measure is used by our management in evaluating the funding available after supporting our
ongoing business operations and our portfolio of product investments. Free cash flow should not be
considered as a substitute measure of net cash flows provided by operating activities, investing
activities or financing activities. Therefore, we believe it is important to view free cash flow as
a complement to our entire consolidated statements of cash flows.
30
We believe these measures are useful because they reflect how we manage our business. These
adjustments to our generally accepted accounting principles in the United States (GAAP) results
are made with the intent of providing both management and investors a more complete understanding
of the underlying operational results, trends and our marketplace performance. The measures
discussed herein are among the primary indicators that management uses as a basis for our planning
and forecasting of future periods, to allocate resources, to evaluate business performance and for
compensation purposes. However, these financial measures (results before non-core gains and
(charges) and free cash flow) are not prepared in accordance with GAAP, and should not be
considered in isolation or as a substitute for total revenue, operating income, operating income
growth, operating margin, net income, tax rate, diluted earnings per share, or net cash provided by
or used in operating activities prepared in accordance with GAAP. In addition, it should be noted
that because not all companies calculate these financial measures similarly or at all, the
presentation of these financial measures is not likely to be comparable to measures of other
companies.
See Results of Operations, below, for a discussion of our results reported on a GAAP basis.
Overview
Our discussion and analysis of our financial condition and results of operations for the three
month and nine month periods ended September 30, 2005, are based upon our unaudited consolidated
financial statements for those periods. The consolidated results for interim periods are not
necessarily indicative of results for the full year or any subsequent period. Our unaudited
consolidated financial statements should be read in conjunction with the consolidated financial
statements and related notes, and managements discussion and analysis of financial condition and
results of operations, which appear in D&Bs Annual Report on Form 10-K for the year ended December
31, 2004.
On January 1, 2005, we began managing our operations in Canada as part of our International
segment. As part of this change, our results are reported under the following two segments: United
States (U.S.) and International (which consists of operations in Canada, Europe, Asia Pacific and
Latin America). We have conformed historical amounts to reflect the new segment structure. The
following table presents the contribution by segment to core revenue and total revenue for each of
the three month and nine month periods ended September 30, 2005 and 2004, respectively:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
Core Revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. |
|
|
76 |
% |
|
|
75 |
% |
|
|
75 |
% |
|
|
75 |
% |
International |
|
|
24 |
% |
|
|
25 |
% |
|
|
25 |
% |
|
|
25 |
% |
Total Revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. |
|
|
76 |
% |
|
|
72 |
% |
|
|
75 |
% |
|
|
70 |
% |
International |
|
|
24 |
% |
|
|
28 |
% |
|
|
25 |
% |
|
|
30 |
% |
31
The
following tables present contributions by customer solution sets to core revenue and total
revenue for each of the three month and nine month periods ended September 30, 2005 and 2004,
respectively:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
Core Revenue Contributions by Customer Solution Set: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk Management Solutions |
|
|
67 |
% |
|
|
67 |
% |
|
|
69 |
% |
|
|
68 |
% |
Sales & Marketing Solutions |
|
|
25 |
% |
|
|
26 |
% |
|
|
24 |
% |
|
|
26 |
% |
E-Business Solutions |
|
|
5 |
% |
|
|
4 |
% |
|
|
5 |
% |
|
|
4 |
% |
Supply Management Solutions |
|
|
3 |
% |
|
|
3 |
% |
|
|
2 |
% |
|
|
2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Revenue Contributions by Customer Solution
Set: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk Management Solutions |
|
|
67 |
% |
|
|
65 |
% |
|
|
69 |
% |
|
|
63 |
% |
Sales & Marketing Solutions |
|
|
25 |
% |
|
|
25 |
% |
|
|
24 |
% |
|
|
24 |
% |
E-Business Solutions |
|
|
5 |
% |
|
|
4 |
% |
|
|
5 |
% |
|
|
4 |
% |
Supply Management Solutions |
|
|
3 |
% |
|
|
2 |
% |
|
|
2 |
% |
|
|
2 |
% |
All of our customer solution sets are sold in each of our segments and are discussed in
greater detail in Item 1. Business of our Form 10-K for the year ended December 31, 2004.
Within our Risk Management Solutions and our Sales & Marketing Solutions, we monitor the
performance of our Traditional products and our Value-Added products.
Risk Management Solutions
Our Traditional Risk Management Solutions generally consist of reports derived from our
database which our customers use primarily to make decisions about new credit applications. For
each of the three month and nine month periods ended September 30, 2005 and 2004, respectively, our
Traditional Risk Management Solutions constituted the following percentages of total Risk
Management Solutions Revenue, Core Revenue and Total Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
Traditional Risk Management: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk
Management Solutions Revenue |
|
|
81 |
% |
|
|
83 |
% |
|
|
82 |
% |
|
|
82 |
% |
Core Revenue |
|
|
54 |
% |
|
|
56 |
% |
|
|
56 |
% |
|
|
56 |
% |
Total Revenue |
|
|
54 |
% |
|
|
54 |
% |
|
|
56 |
% |
|
|
52 |
% |
Our Value-Added Risk Management Solutions generally support automated decision-making and
portfolio management through the use of scoring and integrated software solutions. For each of the
three month and nine month periods ended September 30, 2005 and 2004, respectively, our Value-Added
Risk Management Solutions constituted the following percentages of total Risk Management Solutions
Revenue, Core Revenue and Total Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
Value-Added Risk Management Solutions: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk Management Solutions Revenue |
|
|
19 |
% |
|
|
17 |
% |
|
|
18 |
% |
|
|
18 |
% |
Core Revenue |
|
|
13 |
% |
|
|
11 |
% |
|
|
13 |
% |
|
|
12 |
% |
Total Revenue |
|
|
13 |
% |
|
|
11 |
% |
|
|
13 |
% |
|
|
11 |
% |
32
Sales & Marketing Solutions
Our Traditional Sales & Marketing Solutions generally consist of marketing lists, labels and
customized data files used by our customers in their direct mail and direct marketing activities.
For each of the three months and nine months periods ended September 30, 2005 and 2004,
respectively, our Traditional Sales & Marketing Solutions constituted the following percentages of
total Sales & Marketing Solutions Revenue, Core Revenue and Total Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
Traditional Sales & Marketing Solutions: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales & Marketing Solutions Revenue |
|
|
52 |
% |
|
|
52 |
% |
|
|
49 |
% |
|
|
50 |
% |
Core Revenue |
|
|
13 |
% |
|
|
14 |
% |
|
|
12 |
% |
|
|
13 |
% |
Total Revenue |
|
|
13 |
% |
|
|
13 |
% |
|
|
12 |
% |
|
|
12 |
% |
Our Value-Added Sales & Marketing Solutions generally include decision-making and customer
information management products. For each of the three month and nine month periods ended September
30, 2005 and 2004, respectively, our Value-Added Sales & Marketing Solutions constituted the
following percentages of total Sales & Marketing Solutions Revenue, Core Revenue and Total Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
Value-Added Sales & Marketing Solutions: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales & Marketing Solutions Revenue |
|
|
48 |
% |
|
|
48 |
% |
|
|
51 |
% |
|
|
50 |
% |
Core Revenue |
|
|
12 |
% |
|
|
12 |
% |
|
|
12 |
% |
|
|
13 |
% |
Total Revenue |
|
|
12 |
% |
|
|
12 |
% |
|
|
12 |
% |
|
|
12 |
% |
By utilizing our proprietary DUNSRightTM quality process, we continue to provide customers
with high quality information and business insight when they need to make confident business
decisions. We believe that the DUNSRightTM quality process allows us to achieve best-in-class
data quality. The process consists of quality assurance plus five quality drivers: Global Data
Collection, Entity Matching, the D-U-N-S(R) Number, Corporate Linkage, and Predictive Indicators.
The DUNSRightTM quality process has been a key enabler of progress to date and will continue to
be crucial to our growth going forward. Our DUNSRightTM quality process is explained in more
detail in Item 1. Business of our Form 10-K for the year ended December 31, 2004.
Recently Issued Accounting Standards
See Note 2 Recent Accounting Pronouncements to our unaudited consolidated financial
statements included in this Form 10-Q for disclosure of the impact that recently issued accounting
standards may have on our unaudited consolidated financial statements.
Results of Operations
The following discussion and analysis of our financial condition and results of operations are
based upon our unaudited consolidated financial statements included in this Form 10-Q, and should
be read in conjunction with those financial statements and footnotes, which have been prepared in
accordance with U.S. GAAP.
33
Consolidated Revenues
On January 1, 2005, we began managing our operations in Canada as part of our International
segment. As part of this change, our results are reported under the following two segments: United
States (U.S.) and International.
The following tables present our revenue by segment and our revenue by customer solution set
for each of the three month and nine month periods ended September 30, 2005 and 2004, respectively.
Additionally, these tables reconcile the non-GAAP measure of core revenue to the GAAP measure of
total revenue.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
|
|
(Amounts in millions) |
|
|
(Amounts in millions) |
|
Revenues by Segment: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. |
|
$ |
259.0 |
|
|
$ |
240.2 |
|
|
$ |
775.9 |
|
|
$ |
718.5 |
|
International |
|
|
82.6 |
|
|
|
78.7 |
|
|
|
258.7 |
|
|
|
234.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Core Revenue |
|
|
341.6 |
|
|
|
318.9 |
|
|
|
1,034.6 |
|
|
|
952.8 |
|
Divested Businesses |
|
|
|
|
|
|
14.3 |
|
|
|
|
|
|
|
73.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Revenue |
|
$ |
341.6 |
|
|
$ |
333.2 |
|
|
$ |
1,034.6 |
|
|
$ |
1,026.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
|
|
(Amounts in millions) |
|
|
(Amounts in millions) |
|
Revenues by Customer Solution Set: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk Management Solutions |
|
$ |
229.6 |
|
|
$ |
215.3 |
|
|
$ |
709.7 |
|
|
$ |
653.8 |
|
Sales & Marketing Solutions |
|
|
84.1 |
|
|
|
82.4 |
|
|
|
251.2 |
|
|
|
241.0 |
|
E-Business Solutions |
|
|
17.9 |
|
|
|
12.9 |
|
|
|
50.2 |
|
|
|
36.0 |
|
Supply Management Solutions |
|
|
10.0 |
|
|
|
8.3 |
|
|
|
23.5 |
|
|
|
22.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Core Revenue |
|
|
341.6 |
|
|
|
318.9 |
|
|
|
1,034.6 |
|
|
|
952.8 |
|
Divested Businesses |
|
|
|
|
|
|
14.3 |
|
|
|
|
|
|
|
73.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Revenue |
|
$ |
341.6 |
|
|
$ |
333.2 |
|
|
$ |
1,034.6 |
|
|
$ |
1,026.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30, 2005 vs. three months ended September 30, 2004
For the three months ended September 30, 2005, total revenue increased $8.4 million, or 3% (2%
increase before the effect of foreign exchange) as compared to the three months ended September 30,
2004. This reflects an increase of $22.7 million, or 7% (7% increase before the effect of foreign
exchange) in core revenue and a $14.3 million decrease as a result of the loss of revenue
associated with our divested businesses which were divested in 2004. The revenue increase was
driven by revenue growth in the U.S. of $18.8 million, or 8%, and International of $3.9 million, or
5% (4% increase before the effect of foreign exchange). For the three months ended September 30,
2005, our Italian real estate data business contributed one percentage point of growth in core
revenue with the majority of the growth due to a price increase, which is discussed further in the
International segment section below, and the acquisition of a controlling interest in RIBES S.p.A
in the fourth quarter of 2004.
34
On a customer solution set basis, the $22.7 million increase in our core revenue for the three
months ended September 30, 2005 versus the three months ended September 30, 2004 reflects:
|
|
|
a $14.3 million, or 7%, increase in Risk Management Solutions (6% increase before the
effect of foreign exchange). The increase was driven by an increase in the U.S. of $11.3
million, or 8%, and an increase in International of $3.0 million, or 5% (4% increase before
the effect of foreign exchange). Additionally, as noted above, our Italian real estate data
business contributed one percentage point of Risk Management Solutions growth with the
majority of the growth due to a price increase and the acquisition of a controlling interest
in RIBES S.p.A. |
|
|
|
|
Traditional Risk Management Solutions, which accounted for 81% of total Risk Management
Solutions, increased 5% (5% increase before the effect of foreign exchange). For the three months
ended September 30, 2005, our Italian real estate data business
contributed two percentage points
of Traditional Risk Management Solutions growth with the majority of the growth due to a price
increase and the acquisition of a controlling interest in RIBES S.p.A. Excluding the Italian real
estate data business, Traditional Risk Management Solutions increased primarily due to (i.)
continued growth in our Risk Management subscription plan in the U.S. for our customers who are
willing to increase the level of business they do with us and (ii.) growth in our Self Awareness
Solutions in the U.S., which allows our small business customers to establish, improve and
protect their own credit. The increase in Traditional Risk Management Solutions revenue is
partially offset by a decline in revenue in the United Kingdom. |
|
|
|
|
Our Value-Added Risk Management Solutions increased by 16% (15% increase before the effect of
foreign exchange) due to higher renewal rates on software, and the sale of tailored customer
solutions and services that meet our customers needs. |
|
|
|
|
a $1.7 million, or 2%, increase in Sales & Marketing Solutions (2% increase before the
effect of foreign exchange). This improvement was driven by an increase in the U.S. of $1.6
million, or 2%, and an increase in International of $0.1 million, or less than 1% increase. |
|
|
|
|
Traditional Sales & Marketing Solutions, which accounted for 52% of Sales & Marketing Solutions,
increased 2% (1% increase before the effect of foreign exchange) compared to the three months
ended September 30, 2004. This reflects growth in the U.S. segment, partially offset by lower
revenues resulting from a highly competitive local marketplace particularly in our major
International market, the United Kingdom. |
|
|
|
|
Value-Added Sales & Marketing Solutions, which accounted for 48% of Sales & Marketing Solutions,
increased 2% (3% increase before the effect of foreign exchange) compared to the three months
ended September 30, 2004. The increase is due to revenue from our international relationships and
from our customers migrating from our traditional solutions to our Value-Added Sales & Marketing
Solutions. |
|
|
|
|
a $5.0 million, or 39%, increase in E-Business Solutions (39% increase before the
effects of foreign exchange), representing the results of Hoovers, Inc. The increase was
driven by an increase in U.S. revenue of $4.1 million, or 32%, and in International revenue
of $0.9 million. The increase in the U.S. was primarily due to continued growth in
subscription revenue and strong ad sales. We initiated E-Business Solutions in our
International segment in the fourth quarter of 2004. |
|
|
|
|
a $1.7 million, or 21%, increase in Supply Management Solutions (21% increase before the
effect of foreign exchange) is primarily due to volume growth in our customer contract
renewals in the U.S. |
Nine months ended September 30, 2005 vs. nine months ended September 30, 2004
For the nine months ended September 30, 2005, total revenue increased $8.1 million, or 1% (1%
decrease before the effect of foreign exchange), as compared to the nine months ended September 30,
2004. This reflects an increase of $81.8 million, or 9% (8% increase before the effect of foreign
exchange) in core revenue and a $73.7 million decrease as a result of the loss of revenue
associated with our International divested businesses. The revenue increase was driven by core
revenue growth in the U.S. of $57.4 million, or 8%, and an
35
increase of International core revenue
of $24.4 million, or 10% (6% increase before the effect of foreign exchange). For the nine months
ended September 30, 2005, our Italian real estate data business contributed one percentage point of
core revenue growth with the majority of the growth due to a price increase, and the acquisition of
a controlling interest in RIBES S.p.A.
On a customer solution set basis, the $81.8 million increase in our core revenue results for
the nine months ended September 30, 2005 versus the nine months ended September 30, 2004 reflects:
|
|
|
a $55.9 million, or 9%, growth in Risk Management Solutions (7% increase before the
effect of foreign exchange). The increase
was driven by an increase in the U.S. of $31.4 million, or 7%, and an increase in
International of $24.5 million, or 13% (9% increase before the effect of foreign exchange).
Additionally, as noted above, our Italian real estate data business contributed two percentage
points of Risk Management Solutions growth, with the majority of the growth due to a price
increase and the acquisition of a controlling interest in RIBES S.p.A. |
|
|
|
|
Traditional Risk Management Solutions, which accounted for 82% of total Risk Management
Solutions, increased 8% (6% increase before the effect of foreign exchange). For the nine months
ended September 30, 2005, the increase in Traditional Risk Management Solutions was positively
impacted by two percentage points of growth in our Italian real estate data business with the
majority of the growth due to a price increase and the acquisition of a controlling interest in
RIBES S.p.A. Excluding the Italian real estate data business, Traditional Risk Management
Solutions increased due to (i.) continued growth in our Risk Management subscription plan in the
U.S. for our customers who are willing to increase the level of business they do with us and
(ii.) growth in our Self Awareness Solutions in the U.S., which allows our small business
customers to establish, improve and protect their own credit. |
|
|
|
|
Our Value-Added Risk Management Solutions, which accounted for 18% of total Risk Management
Solutions, increased by 13% (13% increase before the effect of foreign exchange) due to higher
renewal rates on software, and the sale of tailored customer solutions and services that meet our
customers needs. |
|
|
|
|
a $10.2 million, or 4%, increase in Sales & Marketing Solutions (4% increase before the
effect of foreign exchange). Traditional Sales & Marketing Solutions increased 1% (1%
increase before the effect of foreign exchange). The increase is due to increased growth in
the U.S. primarily in our third party channels partially offset by a decrease in our
International segment due to a highly competitive local marketplace particularly in our
major market, the United Kingdom. Value-Added Sales & Marketing Solutions increased by 7%
(7% increase before the effect of foreign exchange) due to the growth in Customer
Information Management (CIM) and revenue from our international
relationships. |
|
|
|
|
a $14.2 million, or 39%, increase in E-Business Solutions, (39% increase before the
effects of foreign exchange), representing the results of Hoovers, Inc. The increase was
driven by an increase in U.S. revenue of $12.3 million, or 34%, and in International revenue
of $1.9 million. The increase in the U.S. was primarily due to continued growth in
subscription revenue and strong ad sales. We initiated E-Business Solutions in our
International segment in the fourth quarter of 2004. |
|
|
|
|
a $1.5 million, or 8%, increase in Supply Management Solutions (7% increase before the
effect of foreign exchange) is primarily due to volume growth in our customer contract
renewals in the U.S.
|
36
Consolidated Operating Costs
The following table presents our consolidated operating costs and operating income for the
three month and nine month periods ended September 30, 2005 and 2004, respectively:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
|
|
(Amounts in millions) |
|
|
(Amounts in millions) |
|
Operating Expenses |
|
$ |
105.7 |
|
|
$ |
98.4 |
|
|
$ |
307.8 |
|
|
$ |
306.9 |
|
Selling and Administrative Expenses |
|
|
143.4 |
|
|
|
148.1 |
|
|
|
451.8 |
|
|
|
461.4 |
|
Depreciation and Amortization |
|
|
8.6 |
|
|
|
11.1 |
|
|
|
26.0 |
|
|
|
34.3 |
|
Restructuring Charge |
|
|
4.7 |
|
|
|
2.7 |
|
|
|
21.6 |
|
|
|
20.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Costs |
|
$ |
262.4 |
|
|
$ |
260.3 |
|
|
$ |
807.2 |
|
|
$ |
823.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income |
|
$ |
79.2 |
|
|
$ |
72.9 |
|
|
$ |
227.4 |
|
|
$ |
203.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses
Operating expenses increased $7.3 million, or 8%, for the three months ended September 30,
2005, compared to the three months ended September 30, 2004. The increase for the three month
period ended September 30, 2005, was primarily due to investments in our DUNSRightTM quality
process, certain tax legislation in Italy which has increased the operating costs of our Italian
real estate data business in 2005, and the impact of foreign exchange partially offset by reduced
costs associated with the sale of our divested businesses in Central Europe, Iberia and France.
Operating expenses increased $0.9 million, or less than 1%, for the nine months ended
September 30, 2005 compared to the nine months ended September 30, 2004. The increase for the nine
month period ended September 30, 2005, was primarily due to certain tax legislation in Italy which
has increased the operating costs of our Italian real estate data business in 2005, investments in
our DUNSRightTM quality process. and the impact of foreign exchange partially offset by reduced
costs associated with the sale of our divested businesses in Central Europe, Iberia and France.
Selling and Administrative Expenses
Selling and administrative expenses decreased $4.7 million, or 3%, for the three months ended
September 30, 2005, compared to the three months ended September 30, 2004. Selling and
administrative expenses decreased $9.6 million, or 2%, for the nine months ended September 30, 2005
compared with the nine months ended September 30, 2004. The decrease for the three and nine month
periods ended September 30, 2005 was primarily due to the (i.) reduced costs associated with the
sale of our divested businesses in, Central Europe, Iberia and France; and (ii.) administrative
cost savings, such as lower compensation costs achieved through our Financial Flexibility Programs
partially offset by (i.) additional costs related to revenue generating investments as well as
additional variable costs (such as commissions and bonus) incurred as a result of increased
revenues; (ii.) legal costs related to the final resolution of all disputes on the sale of our
French business (see Note 8 Contingencies (Additional
Matters) to the unaudited consolidated financial statements to this
Form 10-Q for additional information), and (iii.) the impact of foreign
exchange.
We had net pension cost of $4.3 million and $7.3 million for the three and nine month periods
ended September 30, 2005, respectively, compared to net pension income of $3.4 million and $11.5
million for the three month and nine month periods ended September 30, 2004, respectively. The
decrease in pension income or increase in cost in 2005 was primarily due to a one-quarter
percentage point decrease in the long-term rate of return assumption used in 2005 for our U.S.
Qualified Plan and the one-quarter percentage point decrease in the discount rate applied to the
U.S. Qualified (from January 1, 2005 to September 15, 2005) and Non-Qualified Plans. For the U.S.
Qualified plan, the discount rate was further reduced by another one-half
37
percentage point at
September 15, 2005 due to a plan remeasurement related to a curtailment charge associated with our
2005 Financial Flexibility Program. Additionally, the increased actuarial loss included in our 2005
pension cost, as required by Statement of Financial Accounting Standards (SFAS) No. 87.
Employers Accounting for Pension, contributed to the increase in our 2005 pension cost.
We had post-retirement benefit income of $1.3 million and $4.3 million for the three and nine
month periods ended September 30, 2005, respectively, compared to $3.3 million and $2.3 million for
the three and nine month periods ended September 30, 2004, respectively. For the three months ended
September 30, 2005, the decrease of $2.0 million is due to higher post-retirement benefits for the
third quarter of 2004 reflecting an adjustment associated with actuarial experience. For the nine
months ended September 30, 2005, the increase of $2.0 million in post-retirement benefit income was
primarily due to the enactment of the Medicare Reform Act in the third quarter of 2004 and the
financial impact of related federal guidance concerning actuarial equivalency recognized in the
first quarter of 2005. Additionally, our 2005 post-retirement benefit income reflected fewer plan
participants and drug claims rebate revenue. We consider net pension income and post-retirement
benefit costs to be part of our compensation costs and, therefore, they are included in operating
expenses and in selling and administrative expenses, based upon the classifications of the
underlying compensation costs.
Depreciation and Amortization
Depreciation and amortization decreased $2.5 million, or 23%, for the three months ended
September 30, 2005, compared to the three months ended September 30, 2004. Depreciation and
amortization decreased $8.3 million, or 24%, for the nine months ended September 30, 2005, compared
to the nine months ended September 30, 2004. The decrease for both the three month and the nine
month periods ended September 30, 2005 is primarily driven by our business model changes, which
have enabled us to reduce the capital requirements of our business through continuous
reengineering, leveraging partners in key markets and outsourcing capital intensive activities.
Restructuring Charge
During the three month and nine month periods ended September 30, 2005, we recognized a net
restructuring charge of $4.7 million and $21.6 million respectively, consisting of the following
two Financial Flexibility Programs:
|
|
|
During the three months ended, September 30, 2005, we recognized a $4.5 million
restructuring charge in connection with the 2005 Financial Flexibility Program announced in
February 2005 (2005 Financial Flexibility Program). The charge was
recorded in accordance with SFAS No. 146, Accounting for Costs Associated with Exit or
Disposal Activities. The charge included $4.1 million for severance and termination costs
related to approximately 60 employees, $0.1 million pension plan curtailment charge and $0.3
million for other costs to consolidate or close facilities and relocate employees. During the
three months ended September 30, 2005, approximately 44 employees were terminated in
conjunction with our 2005 Financial Flexibility Program. Under SFAS No. 146, the current
period charge represents the liabilities incurred during the quarter for each of these
obligations. |
|
|
|
|
During the nine months ended September 30, 2005, we recognized a $22.0 million of restructuring
charge in connection with the 2005 Financial Flexibility program. The year-to-date charge
includes $20.2 million for severance and termination costs related to approximately 340
employees, $0.4 million pension plan charge and $1.4 million in for lease termination
obligations. We expect to record approximately $30.0 million to $31.0 million for all
restructuring charges related to the 2005 Financial Flexibility Program including $27.0
million to $28.0 million for severance and termination costs related to approximately 400
positions and $3 million for lease termination obligations and other costs to consolidate
or close facilities and relocate employees. |
|
|
|
|
In addition, during the three months ended September 30, 2005, we recognized a $0.2
million net restructuring charge for the International Business Machines Corporation (IBM)
outsourcing agreement in connection with the 2004 Financial Flexibility Program announced in
February 2004 |
38
|
|
|
(2004 Financial Flexibility Program). The charge included $0.3 million for
severance and termination costs related to approximately 50 employees (offset by a $0.1
million post-retirement curtailment gain due to the 2004 Financial Flexibility Program
employee actions discussed below). During the three months ended September 30, 2005,
approximately 24 employees were terminated in conjunction with our 2004 Financial
Flexibility Program. Under SFAS No. 146, the current period charge represents the
liabilities incurred during the quarter for each of these obligations. |
|
|
|
|
During the nine months ended September 30, 2005, we recognized $0.4 million of restructuring
gain in connection with the 2004 Financial Flexibility Program. The year-to-date gain
includes $5.4 million for severance and termination costs related to approximately 630
employees and $5.8 million post retirement curtailment gain. We expect to record
approximately $5 million before the effects of the post-retirement curtailment gain of
approximately $6 million by the end of 2005. |
|
|
|
|
In accordance with SFAS No. 106, Employers Accounting For Post-Retirement Benefits Other
Than Pensions, we were required to recognize a curtailment gain for the post-retirement
plans related to the employee actions of the 2004 Financial Flexibility Program and 2005
Financial Flexibility Program. The curtailment accounting required us to recognize
immediately a pro-rata portion of the unrecognized prior service cost as a result of the
layoffs. During the three month and nine month periods ended September 30, 2005, we
recognized a $0.1 million and $5.8 curtailment gain, respectively, related to our
post-retirement benefit plan which was recorded as an increase to earnings. For the three
month and nine months ended September 30, 2005, this curtailment gain is included in the
$4.7 million and $21.6 million net restructuring charge recorded for the 2004 Financial
Flexibility Program and 2005 Financial Flexibility Program discussed above. |
During the three months ended September 30, 2004, we recognized a $2.7 million restructuring
charge in connection with our 2004 Financial Flexibility Program in accordance with SFAS No. 146.
The charge of $2.6 million was for severance and termination costs related to approximately 800
employees who were terminated in conjunction with the 2004 Financial Flexibility Program and $0.1
million for lease termination obligations. During of the nine months ended September 30, 2004, we
recorded $20.9 million of restructuring charges in connection with the 2004 Financial Flexibility
program. The year-to-date charge includes $19.4 million for severance and termination costs related
to approximately 350 employees and $1.5 million for lease termination obligations.
Interest Income (Expense) Net
The following table presents our net interest income and expense for each of the three month
and nine month periods ended September 30, 2005 and 2004, respectively:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
|
|
(Amounts in millions) |
|
|
(Amounts in millions) |
|
Interest Income |
|
$ |
2.2 |
|
|
$ |
2.1 |
|
|
$ |
8.1 |
|
|
$ |
6.0 |
|
Interest Expense |
|
|
(5.4 |
) |
|
|
(4.9 |
) |
|
|
(15.7 |
) |
|
|
(14.5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Expense Net |
|
|
($3.2 |
) |
|
|
($2.8 |
) |
|
|
($7.6 |
) |
|
|
($8.5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended September 30, 2005, interest income increased $0.1 million and
interest expense increased $0.5 million as compared with the same period in 2004. The increase in
both interest income and interest expense was primarily due to higher interest rates.
For the nine months ended September 30, 2005, interest income increased $2.1 million and
interest expense increased $1.2 million as compared with the same period in 2004. The increase in
both interest income and interest expense was primarily due to higher interest rates.
39
Minority Interest
For the three months ended September 30, 2005, we recorded minority interest expense of $0.2
million and for the nine months ended September 30, 2005, we recorded minority interest income of
$0.1 million. Minority interest represents the minority owners share of our net income or loss of
our majority-owned Italian real estate data company, RIBES, S.p.A. We began consolidating this
business after we acquired majority control late in the fourth quarter of 2004.
Other Income (Expense) Net
The following table presents our Other Income (Expense) Net for the three month and nine
month periods ended September 30, 2005 and 2004, respectively:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
|
|
(Amounts in millions) |
|
|
(Amounts in millions) |
|
Miscellaneous
Other Income (Expense) Net (a) |
|
$ |
(0.1 |
) |
|
$ |
0.3 |
|
|
$ |
(0.1 |
) |
|
$ |
1.3 |
|
Gain on the
Sale of Investment (b) |
|
|
|
|
|
|
1.2 |
|
|
|
3.5 |
|
|
|
1.2 |
|
Final resolution of all disputes on the sale of our
French business (c) |
|
|
(2.6 |
) |
|
|
|
|
|
|
(3.7 |
) |
|
|
|
|
Gain on Sale
of Businesses (d) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17.3 |
|
Lower costs related to the sale of the Iberian
business (e) |
|
|
|
|
|
|
|
|
|
|
0.8 |
|
|
|
|
|
Impairment Charge on the Net Assets of our Iberian
Operations (f) |
|
|
|
|
|
|
0.8 |
|
|
|
|
|
|
|
(0.4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Other Income (Expense) Net |
|
$ |
(2.7 |
) |
|
$ |
2.3 |
|
|
$ |
0.5 |
|
|
$ |
19.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Miscellaneous Other Income Net decreased $0.4 million for the
three months ended September 30, 2005 as compared to the three months
ended September 30, 2004 and decreased $1.4 million for the nine
months ended September 30, 2005 as compared to the nine months ended
September 30, 2004. The decrease in the three and nine month periods
ended September 30, 2005 is primarily due to lower foreign currency
transaction gains partially offset by lower bank fees. |
|
(b) |
|
During the nine month period ended September 30, 2005, we sold a 5%
investment in a South African company for a pre-tax gain of $3.5
million. During the nine month period ended September 30, 2004, we
sold an investment in the U.S. for a pre-tax gain of $1.2 million. |
|
(c) |
|
During the three month and nine month periods ended September 30,
2005, we recorded a $2.6 million and a $3.7 million charge,
respectively, related to the final resolution of all disputes on the
sale of our French business (see Note 8 Contingencies (Additional
Matters) to the unaudited consolidated financial statements to this
Form 10-Q for additional information). |
|
(d) |
|
During the nine months ended September 30, 2004, we sold our
operations in the (i.) Nordic region for a pre-tax gain of $7.9
million, (ii.) India and Distribution Channels in Pakistan and the
Middle East for a pre-tax gain of $3.8 million; and (iii.) Central
Europe for a pre-tax gain of $5.6 million. |
|
(e) |
|
During the nine months ended September 30, 2005, we recorded a
reversal of $0.8 million of costs as a result of lower than expected
costs related to the sale of our Iberian business during the fourth
quarter of 2004. |
|
(f) |
|
During the three months ended September 30, 2004, we recorded a
reduction of $0.8 million impairment charge made in the second quarter
of 2004 in order to reflect the fair market value of the net assets of
our Iberian operations as of the end of the third quarter of 2004.
During the nine months ended September 30, 2004, we recorded an
impairment charge of $0.4 million related to the write-down of net
assets of our Iberian operations to fair market value. |
40
Provision for Income Taxes
For the three months ended September 30, 2005, our effective tax rate was 57.1%, as compared
to 34.8% for the three months ended September 30, 2004. The effective tax rate for the three months
ended September 30, 2005 was negatively impacted by 12.4 points for the tax associated with the
adoption of FSP No. FAS 109-2 (see Note 2 Recent Accounting Pronouncements for additional
information) relating to foreign cash repatriation, by 8.6 points resulting from an increase in our
tax legacy reserve for Royalty Expense Deductions 1993-1997 (see Note 8 Contingencies (Tax
Matters) for additional information), by 1.0 point resulting from the non-deductibility in some
countries of certain items included within the restructuring charge and positively impacted by 3.2
points for the interest benefit on a carry back claim and tax credit refunds. The effective tax
rate for the three months ended September 30, 2004 had been positively impacted by 2.1 points for
tax benefits related to the sale of our operation in Iberia and by 1.4 points for global tax
planning initiatives.
For the nine months ended September 30, 2005, our effective tax rate was 40.9% as compared to
36.2% for the nine months ended September 30, 2004. The effective tax rate for the nine months
ended September 30, 2005 was negatively impacted by 4.1 points for the tax associated with the
adoption of FSP No. FAS 109-2 (see Note 2 Recent Accounting Pronouncements for additional
information) relating to foreign cash repatriation, by 2.8 points resulting from an increase in our
tax legacy reserve for Royalty Expense Deductions 1993-1997 (see Note 8 Contingencies (Tax
Matters) for additional information) and by 1.2 points resulting from the non-deductibility in some
countries of certain items included within the restructuring charge and positively impacted by 4.1
points for a tax deduction related to the liquidation of dormant entities that remained after the
sale of our operations in the Nordic region (Sweden, Denmark, Norway, and Finland) and by 1.0 point
for the interest benefit on a carry back claim and tax credit refunds. The effective tax rate for
the nine months ended September 30, 2004 had been positively impacted by 1.1 points for tax
benefits related to the sales of our operations in Central Europe, Iberia, India and Nordic region
and positively impacted by 0.6 points for global tax planning initiatives.
Equity in Net Income of Affiliates
During the three and nine month periods ended September 30, 2005, we recorded $0.4 million and
$0.6 million, respectively, as compared to $0.3 million for both the three and nine month periods
ended September 30, 2004.
Earnings per Share
We reported earnings per share, or EPS, for the three month and nine month periods ended
September 30, 2005 and 2004, respectively, as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
Basic Earnings Per Share |
|
$ |
0.48 |
|
|
$ |
0.68 |
|
|
$ |
1.95 |
|
|
$ |
1.93 |
|
Diluted Earnings Per Share |
|
$ |
0.46 |
|
|
$ |
0.65 |
|
|
$ |
1.87 |
|
|
$ |
1.86 |
|
For the three months ended September 30, 2005, basic EPS decreased 29%, compared with the
three months ended September 30, 2004, reflecting a 33% decrease in net income and a 5% reduction
in the weighted average number of basic shares outstanding.
Diluted EPS decreased 29%, compared with the three months ended September 30, 2004, reflecting
a 33% decrease in net income and a 5% reduction in the weighted average number of diluted shares
outstanding. Shares outstanding for the three months ended September 30, 2005, were reduced as a
result of our repurchase of 201,681 of common stock to mitigate the dilutive effect of the shares
issued under our stock incentive plans and Employee Stock Purchase Plan and our
41
repurchase of
793,494 shares in connection with our $400 million, two-year share repurchase program approved by
the Board of Directors in February 2005.
For the nine months ended September 30, 2005, basic EPS increased 1%, compared with the nine
months ended September 30, 2004, reflecting a 5% reduction in the weighted average number of basic
shares outstanding and a 4% decrease in net income. Diluted EPS increased 1%, compared with the
nine months ended September 30, 2004, reflecting a 5% reduction in the weighted average number of
diluted shares outstanding and a 4% decrease in net income. Shares outstanding were reduced for the
nine months ended September 30, 2005 as a result of our repurchase of 924,094 shares of common
stock to mitigate the dilutive effect of the shares issued under our stock incentive plans and
Employee Stock Purchase Plan and our repurchase 2,415,381 shares in connection with our $400
million, two-year share repurchase program approved by the Board of Directors in February 2005.
42
Non-Core Gains and (Charges)
For internal management and reporting purposes, we treat certain gains and (charges) that are
included in Consolidated Operating Costs, Other Income (Expense) Net and Provision for
Income Taxes as non-core gains and (charges). These non-core gains and (charges) are summarized in
the table below. We exclude non-core gains and (charges) when evaluating our financial performance
because we do not consider these items to reflect our underlying business performance.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
Non-core gains and (charges) included in
Consolidated Operating Costs: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring costs related to our Financial
Flexibility Programs |
|
$ |
(4.7 |
) |
|
$ |
(2.7 |
) |
|
$ |
(21.6 |
) |
|
$ |
(20.9 |
) |
(Charge)/Gain related to final resolution of all
disputes on the sale of our French business |
|
$ |
0.4 |
|
|
$ |
|
|
|
$ |
(0.4 |
) |
|
$ |
|
|
Non-core gains and (charges) included in Other
Income (Expense) Net: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on sale of an investment in a South African
Company |
|
$ |
|
|
|
$ |
|
|
|
$ |
3.5 |
|
|
$ |
|
|
Charge related to final resolution of all disputes on
the sale of our French business |
|
$ |
(2.6 |
) |
|
$ |
|
|
|
$ |
(3.7 |
) |
|
$ |
|
|
Lower costs related to the sale of Iberia |
|
$ |
|
|
|
$ |
|
|
|
$ |
0.8 |
|
|
$ |
|
|
Gains on sales of operations in the Nordic region |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
7.9 |
|
Gains on sales of operations in India and
Distribution Channels in Pakistan and the Middle
East |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
3.8 |
|
Gains on sales of operations in Central Europe |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
5.6 |
|
Impairment charge on the write down on net assets of
our Iberian Operations to their fair market
value |
|
$ |
|
|
|
$ |
0.8 |
|
|
$ |
|
|
|
$ |
(0.4 |
) |
Non-core gains and (charges) included in Provision
for Income Taxes: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax Liability for the adoption of FSP No. FAS 109-2,
Accounting and Disclosure Guidance for the Foreign
Earnings Repatriation Provision within the American
Jobs Creation Act of 2004. |
|
$ |
(9.1 |
) |
|
$ |
|
|
|
$ |
(9.1 |
) |
|
$ |
|
|
Increase in Legacy Tax Reserve for Royalty Expense
Deductions 1993-1997 |
|
$ |
(6.3 |
) |
|
$ |
|
|
|
$ |
(6.3 |
) |
|
$ |
|
|
Tax benefits recognized upon the liquidation of
dormant international entities |
|
$ |
|
|
|
$ |
|
|
|
$ |
9.0 |
|
|
$ |
|
|
Restructuring costs related to our Financial
Flexibility Programs |
|
$ |
1.1 |
|
|
$ |
1.0 |
|
|
$ |
5.0 |
|
|
$ |
7.2 |
|
Gain on sale of an investment in a South African
Company |
|
$ |
|
|
|
$ |
|
|
|
$ |
(1.5 |
) |
|
$ |
|
|
Charge related to final resolution of all disputes on
the sale of our French business |
|
$ |
0.8 |
|
|
$ |
|
|
|
$ |
1.5 |
|
|
$ |
|
|
Gains on sale of operations in the Nordic region |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
1.7 |
|
Gains on sale of operations in India and Distribution
Channels in Pakistan and the Middle East |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
(1.9 |
) |
Gains on sales of operations in Central Europe |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
(2.7 |
) |
Impairment charge on the net assets of our Iberian
operations |
|
$ |
|
|
|
$ |
1.3 |
|
|
$ |
|
|
|
$ |
(0.7 |
) |
43
Segment Results
On January 1, 2005, we began managing our operations in Canada as part of our International
segment. As part of this change, our results are reported under the following two segments: U.S.
and International. We have conformed historical amounts to reflect the new segment structure.
The operating segments reported below, U.S. and International, are our segments for which
separate financial information is available, and upon which operating results are evaluated on a
timely basis to assess performance and to allocate resources.
United States
U.S. is our largest segment, representing 76% and 75% of our core revenue and our total
revenue for the three month and nine month periods ended September 30, 2005, respectively. Total
revenue and core revenue for this segment were the same for both the three month and nine month
periods ended September 30, 2005, respectively, as there were no divestitures within this segment
during these periods.
The following table presents our U.S. revenue by customer solution set and U.S. net operating
income for each of the three month and nine month periods ended September 30, 2005 and 2004.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
|
|
(Amounts in millions) |
|
Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk Management Solutions |
|
$ |
160.7 |
|
|
$ |
149.4 |
|
|
$ |
490.7 |
|
|
$ |
459.3 |
|
Sales & Marketing Solutions |
|
|
72.1 |
|
|
|
70.5 |
|
|
|
216.3 |
|
|
|
204.0 |
|
E-Business Solutions |
|
|
17.0 |
|
|
|
12.9 |
|
|
|
48.3 |
|
|
|
36.0 |
|
Supply Management Solutions |
|
|
9.2 |
|
|
|
7.4 |
|
|
|
20.6 |
|
|
|
19.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Core and Total Revenue |
|
$ |
259.0 |
|
|
$ |
240.2 |
|
|
$ |
775.9 |
|
|
$ |
718.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Operating Income |
|
$ |
87.3 |
|
|
$ |
81.0 |
|
|
$ |
267.7 |
|
|
$ |
236.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30, 2005 vs. three months ended September 30, 2004
U.S. total and core revenue increased $18.8 million, or 8%, for the three months ended
September 30, 2005 compared with the three months ended September 30, 2004. The increase is due to
increased revenue in all of our customer solution sets.
On a customer solutions set basis, the $18.8 million increase in total and core revenue for
the three months ended September 30, 2005 versus the three months ended September 30, 2004
reflects:
|
|
|
a $11.3 million, or 8%, increase in Risk Management Solutions. Traditional Risk
Management Solutions, which accounted for 79% of total U.S. Risk Management Solutions,
increased 5%. There were two main drivers of this growth: (i.) the continued growth in our
subscription plan for customers who are willing to increase the level of business they do
with us. The subscription plan provides expanded access to our Risk Management Solutions in
a way that provides more certainty over related costs to the customer, which in turn
generally results in customers increasing their spend on our products; and (ii.) our Self
Awareness Solutions, which allows our small business customers to establish, improve and
protect their own credit. Value-Added Risk Management Solutions, which accounted for 21% of
total U.S. Risk Management Solutions, increased 16%. The increase was primarily attributable
to higher renewal rates on software, and the sale of tailored customer solutions and
services that meet our customers needs, as well as the timing of customer renewals into
this quarter.
|
44
|
|
|
a $1.6 million, or 2%, increase in Sales & Marketing Solutions. Traditional Sales &
Marketing Solutions, which accounted for 51% of total U.S. Sales & Marketing Solutions,
increased 7%. The increase is primarily attributed to the increased strength in our core
solutions in this market. Our Value-Added Sales & Marketing Solutions, which accounted for
49% of total U.S. Sales & Marketing Solutions decreased by 3%. The decrease was primarily
driven by a shift in the timing of customer renewals. |
|
|
|
|
a $4.1 million, or 32%, increase in E-Business Solutions representing the results of
Hoovers Inc. The increase is attributed to the continued growth in subscription revenue and
strong ad sales. |
|
|
|
|
a $1.8 million, or 26%, increase in Supply Management Solutions, our smallest solution
set, is primarily due to an increase in value in our customer contract renewals and
acquisition of new customers. |
Revenue growth across all customer solution sets also benefited from our DUNSRight quality
process, resulting in an improved value proposition for our customers.
U.S. net operating income for the three months ended September 30, 2005 was $87.3 million,
compared to $81.0 million for the three months ended September 30, 2004, an increase of $6.3
million, or 8%. The increase in operating income was due to an 8% increase in U.S. revenue for the
three months ended September 30, 2005 as compared to the three months ended September 30, 2004, the
benefits of our reengineering efforts offset by related investments made to drive revenue growth
and the acquisition of LiveCapital, Inc.
Nine months ended September 30, 2005 vs. nine months ended September 30, 2004
U.S. total and core revenue increased $57.4 million, or 8%, for the nine months ended
September 30, 2005 compared to the nine months ended September 30, 2004. The increase is due to
increased revenue in all of our customer solution sets.
On a customer solutions set basis, the $57.4 million increase in total and core revenue for
the nine months ended September 30, 2005 versus the nine months ended September 30, 2004 reflects:
|
|
|
a $31.4 million, or 7%, increase in Risk Management Solutions. Traditional Risk
Management Solutions, which accounted for 78% of total U.S. Risk Management Solutions,
increased 5%. There were two main drivers of this growth: (i.) the continued growth in our
subscription plan for customers who are willing to increase the level of business they do
with us; and (ii.) our Self Awareness Solutions, which allow our small business customers to
establish, improve and protect their own credit. Value-Added Risk Management Solutions,
which accounted for 22% of total U.S. Risk Management Solutions, increased 13%. The increase
was primarily attributable to higher renewal rates on software, and the sale of tailored
customer solutions and services that meet our customers needs. |
|
|
|
|
a $12.3 million, or 6%, increase in Sales & Marketing Solutions. Traditional Sales &
Marketing Solutions, which accounted for 48% of total U.S. Sales & Marketing Solutions,
increased 9%. The increase in the Traditional Sales & Marketing Solutions is driven by our
investments in our
DUNSRighttm quality process which has resulted in revenue growth in our
third party channels as well as investments in Traditional product enhancements. Our
Value-Added Sales & Marketing Solutions, which accounted for 52% of total U.S. Sales &
Marketing Solutions, increased by 3%. The increase was primarily driven by our CIM products. |
|
|
|
|
a $12.3 million, or 34%, increase in E-Business Solutions representing the results of
Hoovers Inc. The increase is attributable to the continued growth in subscription revenue
and strong ad sales. |
|
|
|
|
$1.4 million, or 8%, increase in Supply Management Solutions, our smallest solution set,
is primarily due to an increase in value in our customer contract renewals. |
Revenue growth also benefited from our DUNSRight quality process, resulting in an improved
value proposition for our customers.
45
U.S. operating income for the nine months ended September 30, 2005 was $267.7 million,
compared to $236.5 million for the nine months ended September 30, 2004, an increase of $31.2
million, or 13%. The increase in operating income was due to an 8% increase in U.S. revenue for the
nine months ended September 30, 2005, the benefits of our reengineering efforts offset by related
investments made to drive revenue growth and the acquisition of LiveCapital, Inc.
International
International represented 24% and 25% of our total revenue and core revenue for the three
month and nine month periods ended September 30, 2005, respectively. The following table presents
our International revenue by customer solution set and international net operating income for each
of the three month and nine month periods ended September 30, 2005 and 2004. Additionally, this
table reconciles the non-GAAP measure of core revenue to the GAAP measure of total revenue.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
|
|
(Amounts in millions) |
|
Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk Management Solutions |
|
$ |
68.9 |
|
|
$ |
65.9 |
|
|
$ |
219.0 |
|
|
$ |
194.5 |
|
Sales & Marketing Solutions |
|
|
12.0 |
|
|
|
11.9 |
|
|
|
34.9 |
|
|
|
37.0 |
|
E-Business Solutions |
|
|
0.9 |
|
|
|
|
|
|
|
1.9 |
|
|
|
|
|
Supply Management Solutions |
|
|
0.8 |
|
|
|
0.9 |
|
|
|
2.9 |
|
|
|
2.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
International Core Revenue |
|
|
82.6 |
|
|
|
78.7 |
|
|
|
258.7 |
|
|
|
234.3 |
|
Divested Businesses |
|
|
|
|
|
|
14.3 |
|
|
|
|
|
|
|
73.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total International Revenue |
|
$ |
82.6 |
|
|
$ |
93.0 |
|
|
$ |
258.7 |
|
|
$ |
308.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Operating Income |
|
$ |
13.1 |
|
|
$ |
13.5 |
|
|
$ |
35.5 |
|
|
$ |
45.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30, 2005 vs. three months ended September 30, 2004
International total revenue decreased $10.4 million, or 11% (12% decrease before the effect of
foreign exchange), for the three months ended September 30, 2005 as compared to the three months
ended September 30, 2004, primarily as a result of our having divested certain businesses. These
divested businesses accounted for $14.3 million of revenue for the three months ended September 30,
2004. International core revenue increased $3.9 million or 5% (4% increase before the effect of
foreign exchange), for the three months ended September 30, 2005, as compared to the three months
ended September 30, 2004. For the three months ended September 30, 2005, our Italian real estate
data business contributed four percentage points of core revenue growth with the majority of the
growth due to a price increase and the acquisition of a controlling interest in RIBES S.p.A.
On a customer solution set basis, the $3.9 million increase in International core revenue for
the three months ended September 30, 2005 versus the three months ended September 30, 2004
reflects:
|
|
|
a $3.0 million, or 5%, increase in Risk Management Solutions (4% increase before the
effect of foreign exchange), as follows: |
|
|
|
|
For the three months ended September 30, 2005, Traditional Risk Management Solutions, which
accounted for 88% of total International Risk Management Solutions, increased 3% (3% increase
before the effect of foreign exchange). This increase was primarily attributed to our Italian
real estate data business, which contributed seven percentage points of growth, with the majority
of such growth due to a price increase and the acquisition of a controlling interest in RIBES
S.p.A. Excluding the Italian real estate data business, Traditional Risk Management Solutions
decreased due to a decline in revenue in the United Kingdom resulting primarily from the
continued impact of lower customer product usage due to our insufficient focus on customer
renewals in late 2004 and the first quarter of |
46
|
|
|
2005 partially offset by an increase in revenue in
our other International markets, primarily resulting from increased product usage by existing
customers. |
|
|
|
|
For the three months ended September 30, 2005, Value-Added Risk Management Solutions, which
accounted for 12% of total International Risk Management Solutions, increased 14% (13% increase
before the effect of foreign exchange). The increase was primarily driven by new project oriented
business in our Benelux and Asia Pacific markets, partially offset by a decline in project
revenue from certain of our Italian market businesses. |
|
|
|
|
Sales & Marketing Solutions remained flat as compared to the prior year period, as
follows: |
|
|
|
|
For the three months ended September 30, 2005, Traditional Sales & Marketing Solutions, which
accounted for 60% of our total International Sales & Marketing Solutions, decreased 21% (21%
decrease before the effect of foreign exchange). Such decrease was primarily attributed to lower
revenues resulting from a highly competitive marketplace in the United Kingdom. |
|
|
|
|
For the three months ended September 30, 2005, our Value-Added Sales & Marketing Solutions, which
accounted for 40% of our total International Sales & Marketing Solutions, increased 61% (60%
increase before the effect of foreign exchange), due to revenue from our international partners
and from our customers migrating from our traditional offerings to our Value-Added Sales &
Marketing Solutions. |
|
|
|
|
a $0.9 million of revenue from E-Business Solutions, which we initiated in the fourth
quarter of 2004. |
|
|
|
|
a $0.1 million, or 18%, decrease in Supply Management Solutions (19% decrease before the
effect of foreign exchange). |
International core revenue growth also benefited from revenue related to our international
market leadership strategy. Through this strategy, we have developed partnerships with strong local
partners who have enhanced our DUNSRight quality process.
Net international operating income decreased $0.4 million, or 4%, for the three months ended
September 30, 2005 as compared to the three months ended September 30, 2004. This decrease is
primarily due to a decline in revenue in the United Kingdom, increased expense related to the
investigation and final resolution of the dispute on the sale of our French business, increased
legal expenses, the loss of income from our divested businesses and increased investments in data
to drive revenue growth in certain of our international markets. The decrease is partially offset
by the benefits of our reengineering efforts.
Nine months ended September 30, 2005 vs. nine months ended September 30, 2004
International total revenue decreased $49.3 million, or 16% (19% decrease before the effect of
foreign exchange), for the nine months ended September 30, 2005 as compared to the nine months
ended September 30, 2004, primarily as a result of our having divested certain businesses. These
divested businesses accounted for $73.7 million of revenue for the nine months ended September 30,
2004. International core revenue increased $24.4 million, or 10% (6% increase before the effect of
foreign exchange), for the nine months ended September 30, 2005, as compared to the nine months
ended September 30, 2004. For the nine months ended September 30, 2005, our Italian real estate
data business contributed five percentage points of core revenue growth with the majority of the
growth due to a price increase and the acquisition of a controlling interest in RIBES S.p.A.
On a customer solution set basis, the $24.4 million increase in International core revenue for
the nine months ended September 30, 2005 versus the nine months ended September 30, 2004 reflects:
|
|
|
a $24.5 million, or 13%, increase in Risk Management Solutions (9% increase before the
effect of foreign exchange), as follows: |
|
|
|
|
For the nine months ended September 30, 2005, Traditional Risk Management Solutions, which
accounted for 90% of total International Risk Management Solutions, increased 13% (8% increase
before the effect of foreign exchange). Such increase was primarily attributed to our Italian
real estate |
47
|
|
|
data business, which contributed seven percentage points of growth, with the majority
of such growth due to a price increase and the acquisition of a controlling interest in RIBES
S.p.A. Excluding the Italian real estate data business, Traditional Risk Management Solutions was
flat due to a decline in revenue in the United Kingdom resulting primarily from the continued
impact of lower customer product usage due to our insufficient focus on customer renewals in late
2004 and the first quarter of 2005 offset by an increase in revenue in our other International
markets, primarily resulting from increased product usage by existing customers. |
|
|
|
|
For the nine months ended September 30, 2005, Value-Added Risk Management Solutions which
accounted for 10% of total International Risk Management Solutions increased 14% (9% increase
before the effect of foreign exchange). The increase was primarily driven by new project oriented
business in our Benelux and Asia Pacific markets and royalties from our partnership
relationships, partially offset by a decline in customers and customer usage in certain of our
Italian businesses. |
|
|
|
|
a $2.1 million, or 6%, decrease in Sales & Marketing Solutions (9% decrease before the
effect of foreign exchange), as follows: |
|
|
|
|
For the nine months ended September 30, 2005, Traditional Sales & Marketing Solutions, which
accounted for 55% of our total International Sales & Marketing Solutions, decreased 27% (29%
decrease before the effect of foreign exchange). Such decrease was attributed to lower revenues
resulting from a highly competitive marketplace in the United Kingdom. |
|
|
|
|
For the nine months ended September 30, 2005, our Value-Added Sales & Marketing Solutions, which
accounted for 45% of our total International Sales & Marketing, increased 45% (41% increase
before the effect of foreign exchange). This is due to revenue from our international partners
and from our customers migrating from our traditional offerings to our Value-Added Sales &
Marketing Solutions. |
|
|
|
|
$1.9 million of revenue from E-Business Solutions, which we initiated in the fourth
quarter of 2004. |
|
|
|
|
Supply Management Solutions remained flat as compared to the prior year period. |
Net international operating income decreased $10.3 million, or 23%, for the nine months ended
September 30, 2005 as compared to the nine months ended September 30, 2004, primarily due to a
decline in revenue in the United Kingdom, the loss of income from our divested businesses,
increased expenses related to the investigation and final resolution of the dispute on the sale of
our French business, as described in Note 8 Contingencies (Additional Matters) to the unaudited
consolidated financial statements to this Form 10-Q, increased legal expenses and increased
investments in data to drive revenue growth in certain of our international markets. The decrease is partially offset by the benefits of our reengineering efforts.
These factors are offset by savings obtained as a result of our Financial Flexibility Program.
The following factors affecting International create particular challenges to our
international business:
|
|
|
Our competition is primarily local, and our customers may have greater loyalty to our
local competitors. |
|
|
|
|
Credit insurance is a significant credit risk mitigation tool in certain markets. This
reduces the demand for information-based credit risk mitigation tools, such as those offered
by us. |
|
|
|
|
In certain local markets, key data elements are generally available from public-sector
sources, thus reducing our data collection advantage. |
|
|
|
|
Our revenue from our real estate data business in Italy continues to be subject to a
number of risks and uncertainties due to (i) recent tax legislation which could result in
additional declines in customer usage, as customers evaluate the related price increases;
(ii) competitive pressures; and (iii) future legislative actions that might further impact
the economics of our operations. |
The recent tax legislation in Italy has increased the operating costs of our Italian real
estate data business in 2005. Specifically, the law increases data acquisition costs for Italian
real estate data that we acquire to support our business. Our action plan to address these
incremental costs and mitigate the impact to our
48
operating income in Italy has been a combination of price increases to our customers, which we
implemented in February 2005, and reengineering efforts. We continue to monitor our Italian
operations and are continuing to consider our strategic alternatives with respect to this business.
Liquidity and Financial Position
In accordance with our Blueprint for Growth strategy, we have used our cash for three primary
purposes: investments in the current business, acquisitions as appropriate, and our share
repurchase programs.
We believe that cash provided by operating activities, supplemented as needed with readily
available financing arrangements, are sufficient to meet our short-term and long-term needs,
including the cash cost of our restructuring charges, transition costs, contractual obligations and
contingencies (see Note 8 Contingencies to the unaudited consolidated financial statements to
this Form 10-Q). In addition, our $300 million debt obligation under our fixed-rate notes is
repayable in March 2006. We are currently reviewing all available alternatives with respect
thereto, including, the possibility of refinancing of such debt.
Cash Provided by Operating Activities
Net cash provided by operating activities decreased by $15.2 million for the nine months ended
September 30, 2005 compared to the same period in 2004. This decline was driven by $50.3 million of
increased tax payments due to the settlement of our legacy tax matters. Also impacting the decline
in cash flows from operations was spending related to restructuring which was $26.8 million in for
the nine months ended September 30, 2005 compared with $19.6 million for the same period in 2004.
These increased uses of cash were partially offset by higher sales, increased tax refunds and a
decline in outflows relating to accounts payable and accrued liabilities due to timing of payments.
Cash Used in Investing Activities
Our business is not capital-intensive, and most of our spending to grow the business is funded
by operating cash flow. As a result of our Financial Flexibility Program, we have sold non-core
businesses and real estate assets. Proceeds from these sales have partially (or in some cases,
fully) offset our capital expenditures and additions to computer software and other intangibles, as
described below.
Net cash provided by investing activities totaled $66.0 million in the nine months ended
September 30, 2005, compared with net cash used in investing activities of $48.4 million in nine
months ended September 30, 2004. This change primarily relates to the following activities in both
years.
During nine months ended September 30, 2005, we received $82.6 million from the sale of net
investments in short-term marketable securities. During nine months ended September 30, 2004, we
incurred $76.8 million of net investments in short-term marketable securities.
During the nine months ended September 30, 2005, we received net proceeds of $18.5 million
related to the sale of the following:
|
|
|
In April of 2005, we sold our equity investment in South Africa for proceeds of $5.3
million. |
|
|
|
|
In October of 2004, we sold our operations in France to BASE DInformations Legales
Holding S.A.S. (Bil Holding) for $30.1 million, primarily consisting of $15.0 million in
cash and $14.0 million in other receivables. During the nine months ended September 30,
2005, we collected a majority of the receivables outstanding. |
|
|
|
|
In May of 2004, we completed the sale of our Central European operations to Bonnier
Affarsinformation AB. Proceeds were $25.7 million, consisting of $18.1 million in cash and
$7.6 million in other receivables, of which $5.6 million was collected in June 2004 and the
remaining was collected in 2005.
|
49
During the nine months ended September 30, 2005, we made payment of $17.9 million related to
the following:
|
|
|
In July of 2005, we acquired LiveCapital, Inc. We paid $16.6 million, net of cash
acquired of $0.5 million. |
|
|
|
|
During 2004, we acquired an additional 16% interest in RIBES S.p.A., resulting in a 51%
ownership interest in RIBES, a leading provider of business information to Italian banks for
$3.4 million (net of cash acquired), of which $2.0 million was paid during the fourth quarter of 2004. The remaining $1.3 million was paid in the third quarter of 2005. |
During the nine months ended September 30, 2004, we received net proceeds of $56.5 million
related to the sale of the following:
|
|
|
In May of 2004, we completed the sale of our Central European operations to Bonnier.
Proceeds were $25.7 million, consisting of $18.1 million in cash and $7.6 million in other
receivables, of which $5.6 million was collected in June 2004. |
|
|
|
|
In February of 2004, we sold our operations in India and our Distribution Channels in
Pakistan and the Middle East for $7.7 million. We received proceeds of $7.3 million (net of
withholding tax), consisting of cash of $6.5 million and an investment in the amount of $0.8
million representing a 10% remaining interest in the divested entity. |
|
|
|
|
In December of 2003, we sold our Nordic operations to Bonnier Affarsinformation AB. We
received proceeds from the sale of $42.7 million, consisting of cash of $35.9 million, notes
receivable of $5.9 million and another receivable of $0.9 million. |
Investments in total capital expenditures, including computer software and other intangibles
were $17.9 million in the nine months ended September 30, 2005 and $19.6 million in the nine months
ended September 30, 2004, primarily in the U.S. segment for both periods.
Cash Used in Financing Activities
Net cash used in financing activities was $197.0 million for the nine months ended September
30, 2005 and $174.9 million for the nine months ended September 30, 2004.
During the nine months ended September 30, 2005 and 2004, cash used in financing activities
was largely attributable to the purchase of treasury shares. In the nine months ended September 30,
2005, we repurchased 924,094 shares of stock for $57.0 million to mitigate the dilutive effect of
the shares issued under our stock incentive plans and Employee Stock Purchase Plan. Additionally,
during the nine months ended September 30, 2005, we repurchased 2,415,381 shares for $150.6 million
related to a previously announced $400 million two-year share repurchase program approved by our
Board of Directors in February, 2005. In the nine months ended September 30, 2004, we repurchased
919,000 shares of stock for $48.7 million to mitigate the dilutive effect of the shares issued
under our stock incentive plans and Employee Stock Purchase Plan. Additionally, during the nine
months ended September 30, 2004, we repurchased 2,591,940 shares for $140.7 million related to a
previously announced $200 million one-year share repurchase program approved by our Board of
Directors in February, 2004. This program was completed by December 31, 2004.
For the nine months ended September 30, 2005, net proceeds from our stock plans were $18.5
million, compared with $14.2 million for the nine months ended September 30, 2004.
As part of our spin-off from Moodys/D&B2 in 2000, Moodys and D&B entered into a Tax
Allocation Agreement dated as of September 30, 2000 (the TAA). Based on the TAA, we made a
payment of $9.2 million to Moodys/D&B2 during the second quarter of 2005. See Future Liquidity
Sources and Uses of Funds Spin-off Obligation for further detail.
At September 30, 2005, certain of our international operations had non-committed lines of
credit of $12.8 million and had $2.0 million of borrowings outstanding under these lines of credit.
These arrangements have no material commitment fees or compensating balance requirements.
50
Free Cash Flow
We define free cash flow as net cash provided by operating activities less capital
expenditures and additions to computer software and other intangibles. The following table provides
reconciliation from our net cash provided by operating activities to free cash flow:
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Nine Months |
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Ended |
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|
September 30, |
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2005 |
|
|
2004 |
|
Net Cash provided by Operating Activities |
|
$ |
159.1 |
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$ |
174.3 |
|
Capital Expenditures |
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|
(4.5 |
) |
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|
(9.1 |
) |
Additions to Computer Software and Other Intangibles |
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|
(13.4 |
) |
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|
(10.5 |
) |
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|
|
|
|
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|
|
Free Cash Flow |
|
$ |
141.2 |
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$ |
154.7 |
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|
The decrease in free cash flow is primarily attributed to the decrease in net cash provided by
operating activities as described above.
Future Liquidity Sources and Uses of Funds
Contractual Obligations
Our $300 million debt obligation under our fixed-rate notes is repayable in March 2006. We are
currently reviewing all available alternatives with respect thereto, including, the possibility of
refinancing such debt.
On September 30, 2005, we entered into an interest rate derivative transaction with an
aggregate notional amount of $200 million. The objective of the hedge is to eliminate the
variability of future cash flows from market changes in treasury
rates in the anticipation of a
future debt issuance during the first half of 2006. This transaction will be accounted for as a
cash flow hedge. As such, changes in fair value of the swap that take place through the date of
debt issuance will be recorded in accumulated other comprehensive income. As of September 30, 2005,
the derivative transaction had no impact to accumulated other comprehensive income.
Share Repurchases
During the nine months ended September 30, 2005, we repurchased 2,415,381 shares for $150.6
million related to a previously announced $400 million, two-year share repurchase program, approved
by our Board of Directors in February, 2005. It is our intention to repurchase the remaining $249.4
million by December 2006, subject to market and other conditions beyond our control.
We also intend to continue to repurchase shares, subject to market conditions, to offset the
dilutive effect of the shares issued under our stock incentive plans and Employee Stock Purchase
Plan. During the first nine months of 2005, we repurchased 924,094 shares of stock for $57.0
million. Partially offsetting the cash used for repurchase is $18.5 million of proceeds from
employees related to the stock incentive plans and Employee Stock Purchase Plan.
Dividends
We have not paid cash dividends since we separated from Moodys in 2000 and we currently have
no plans to do so.
Spin-off Obligation
As part of our spin-off from Moodys/D&B2 in 2000, we entered into the TAA. Under the TAA,
Moodys/D&B2 and D&B agreed that Moodys/D&B2 would be entitled to deduct compensation expense
associated with the exercise of Moodys/D&B2 stock options (including Moodys/D&B2 options
exercised by D&B employees) and D&B would be entitled to deduct the compensation expense associated
with the exercise of D&B stock options (including D&B options exercised by employees of
Moodys/D&B2). Put
51
simply, the tax deduction goes to the company that issued the stock option. The
TAA provides, however, that if the IRS issues rules, regulations or other authority contrary to the
agreed upon treatment of the tax deductions under the TAA, then the party that becomes then
entitled to take the deduction may be required to indemnify the other party for the loss of such
deduction. The IRS issued rulings discussing an employers entitlement to stock option deductions
after a spin-off or liquidation that appears to require that the tax deduction belongs to the
employer of the optionee and not the issuer of the option. (i.e. D&B would be entitled to deduct
compensation expense associated with a D&B employee excising a Moodys/D&B2 option). We made a
payment of $9.2 million to Moodys/D&B2 in the second quarter of 2005 with regard to the foregoing.
With regard to this matter, we may be required to pay additional amounts in the future based upon
interpretations by the parties of the TAA, timing of future exercises of options, the future price
of the stock underlying the stock options and relevant tax rates.
Potential Payments in Settlement of Tax and Legal Matters
We and our predecessors are involved in certain tax and legal proceedings, claims and
litigation arising in the ordinary course of business. These matters are at various stages of
resolution, but could ultimately result in cash payments in the amounts described in Note 8
Contingencies (Legal Proceedings) in Notes to Consolidated Financial Statements in Part I, Item
1 of this Form 10-Q as well as payments the amount of which cannot be determined at the present
time. We believe we have adequate reserves recorded in our consolidated financial statements for
our share of current exposures in the matters described in Note 8 Contingencies (Legal Proceedings) in Notes to Consolidated Financial Statements in Part I, Item 1 of this Form
10-Q.
Available Facilities
At September 30, 2005, we had a total of $300 million of bank credit facilities available at
prevailing short-term interest rates, which will expire in September 2009. These facilities also
support our potential commercial paper borrowings up to $300 million. We have not drawn on the
facilities and we did not have any borrowings outstanding under these facilities at September 30,
2005 or 2004. We also have not borrowed under our commercial paper program in 2005 or 2004. We
believe that cash flows generated from operations, supplemented as needed with readily available
financing arrangements, are sufficient to meet our short-term and long-term needs, including any
payments that may be required in connection with our Financial Flexibility Program restructuring
charges discussed in Note 3 Impact of Implementation of the Blueprint for Growth Strategy to our
unaudited consolidated financial statements, to meet commitments and contractual obligations as
explained in more detail in Note 12 of our Form 10-K for the year ended December 31, 2004, and to
settle the contingencies discussed in Note 8 to our unaudited consolidated financial statements
included in this Form 10-Q, excluding the matters identified therein for which the exposures are
not estimable. The facilities require the maintenance of interest coverage and total debt to EBITDA
ratios (each as defined in the agreement). We were in compliance with these requirements at
September 30, 2005 and 2004.
Forward-Looking Statements
We may from time to time make written or oral forward-looking statements, including statements
contained in filings with the Securities and Exchange Commission, in reports to shareholders and in
press releases and investor Webcasts. You can identify these forward-looking statements by use of
words like anticipates, aspirations, believes, continues, estimates, expects, goals,
guidance, intends, outlook, plans, projects, strategy, targets, will and other
words of similar meaning. You can also identify them by the fact that they do not relate strictly
to historical or current facts.
We cannot guarantee that any forward-looking statement will be realized, although we believe
we have been prudent in our plans and assumptions. Achievement of future results is subject to
risks, uncertainties and inaccurate assumptions. Should known or unknown risks or uncertainties
materialize, or should underlying assumptions prove inaccurate, actual results could vary
materially from those anticipated, estimated or projected. Investors should bear this in mind as
they consider forward-looking statements and whether to invest in, or remain invested in, our
securities. In connection with the safe harbor provisions of the Private
52
Securities Litigation
Reform Act of 1995, we are identifying in the following paragraphs important factors that,
individually or in the aggregate, could cause actual results to differ materially from those
contained in any forward-looking statements made by us; any such statement is qualified by
reference to the following cautionary statements.
Demand for our products is subject to intense competition, changes in customer preferences
and, to a lesser extent, economic conditions. Our results are dependent upon our continued ability
to:
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successfully manage our strategic partners in our International segment and our outsource
vendors and fully realize expected DUNSRight quality process improvements; |
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effectively communicate and sell the value of our DUNSRight quality process to our
customers, improve customer satisfaction and increase penetration into existing customer
accounts; |
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reallocate expenses to invest for growth through our Financial Flexibility Program; |
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accurately forecast cost increases associated with increasing revenue growth; |
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accurately forecast the cost of complying with increasing regulatory requirements, such
as Sarbanes-Oxley requirements; |
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invest in our database and maintain our reputation for providing reliable data; |
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manage employee satisfaction and maintain our global expertise as we implement our
Financial Flexibility Program; |
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protect against damage or interruptions affecting our database or our data centers or any
unauthorized access to or use of our data by third parties or of the data that we provide to
third parties; |
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develop new products or enhance existing ones to meet customer needs; |
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sustain growth in the context of our competition, including challenges to our E-Business
in light of the acquisition of OneSource by I-USA, the launch of competitive products, the
potential improvement of other pan-European networks in Europe, and the efforts by Equifax
to grow their position in the small business decision-making market; and |
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implement pricing programs and policies that enable us to capture the additional value we
provide through enhanced data and services. |
We are also subject to the effects of foreign economies, exchange rate fluctuations, U.S. and
foreign legislative or regulatory requirements, and the adoption of new, or changes in, accounting
policies and practices, including pronouncements promulgated by the Securities and Exchange
Commission and the Financial Accounting Standards Board or other standard-setting bodies. Our
results are also dependent upon the availability of data for our database, our continued use of
such data at existing cost structures and unfettered by new U.S. or foreign laws or regulations
regarding the use, collection or aggregation of such data by us or by third parties on whom we
rely, and the ability of our strategic partners to fulfill their contractual obligations to satisfy
our customers and promote and protect the D&B brand. In addition, our ability to repurchase shares
is subject to market conditions, including trading volume in our stock, and our ability to
repurchase securities in accordance with all applicable securities law. Developments in any of
these areas could cause our results to differ materially from results that have been or may be
projected. With respect to the ultimate resolution or settlement of our Tax Legacy Matters, the
final amounts payable by us may differ from the estimates reflected in our current reserves due to
a number of factors, including judicial, legislative and/or regulatory developments, the terms of
any final settlement agreements, final interest computations, the terms of the Tax Sharing
Agreements, and whether the other parties having a contractual obligation to pay a portion of this
liability pay their allocable share on a timely basis.
We elaborate on the above list of important factors throughout this document and in our other
filings with the SEC, particularly in the section entitled Trends, Risks and Uncertainties below.
It should be understood that it is not possible to predict or identify all risk factors.
Consequently, the above list of important factors or the trends, risks and uncertainties discussed
herein should not be considered to be a complete discussion of all
53
our potential trends, risks and
uncertainties. We do not undertake to update any forward-looking statement we may make from time to
time.
Trends, Risks and Uncertainties
We may be unable to achieve our revenue and earnings per share growth targets.
We have established revenue and earnings per share growth targets for 2005 and aspirations for
the long term. While we believe that our initiatives and investments will be sufficient to achieve
and maintain such growth targets, no assurance can be made as to when or whether we will continue
to be successful. A failure to reach and maintain our desired revenue growth or our earnings per
share growth targets could have a material adverse effect on the market value of our common stock.
|
|
| We may be unable to reduce our expense base through our Financial Flexibility program, and the
related reinvestments from savings from this program may not produce the level of desired revenue
growth. |
Successful execution of our Blueprint for Growth strategy will include reducing our expense
base through our Financial Flexibility program, and reallocating our expense base reductions into
initiatives that produce our desired revenue growth. The success of this program may be affected by
our ability to implement all of the actions required under this program within the established
timeframe, to enter into or amend agreements with third-party vendors to renegotiate terms
beneficial to us, and to complete agreements with our local works councils and trade unions related
to potential reengineering actions in certain International markets. While we have been successful
at reducing our expense base to date, our reallocations into initiatives have not yet been proven
to sustain revenue growth over a multi-year period. If we fail to continue to reduce our expense
base, or if we do not achieve our desired level of revenue growth, the market value of our common
stock may suffer.
We are dependent upon third parties for certain services.
As part of our Financial Flexibility Programs, we have outsourced various functions, including
certain of our data center operations and technology help desk and network management functions in
the United States and in the United Kingdom, as well as certain portions of our data acquisition
and delivery, customer service and financial processes including, primarily, cash collections and
accounts payable. If one of the third-party providers were to experience financial or operational
difficulties, their services to us may suffer.
Data suppliers might withdraw data from us, leading to our inability to provide products and
services.
We obtain much of the data that we use from third parties, direct contact with businesses
through our call centers, and by purchasing data from public record sources. As we implement
business model changes in various countries in our International segment, we are entering into
agreements with a single provider for all of our local data requirements from those countries. We
could suffer a material adverse effect if owners or providers of the data we use were to withdraw
the data, cease making the data available, or not adhere to our data quality requirements. If a
substantial number of data providers were to withdraw their data, cease making it available, or not
adhere to our data quality standards, our ability to provide products and services to our customers
could be materially adversely impacted, which could result in decreased revenue, net income and
earnings per share.
We may be unable to adapt successfully to changes in our customers preferences for our products.
Our success depends in part on our ability to adapt our products to our customers
preferences. Advances in information technology and uncertain or changing economic conditions are
changing the way our customers use business information. As a result, our customers are demanding
lower prices and more from our products, such as decision-making tools like credit scores and
electronic delivery formats. If we do not successfully adapt our products to our customers
preferences, our business, financial condition and results of operations would be adversely
affected.
54
We face competition that may cause price reductions or loss of market share.
We are subject to competitive conditions in all aspects of our business. We compete directly
with a broad range of companies offering business information services to customers. We have faced
increased competition from consumer credit companies that offer consumer information products to
help their customers make credit decisions regarding small businesses. We also face competition
from:
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the in-house operations of the businesses we seek as customers; |
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other general and specialized credit reporting and other business information services; |
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other information and professional service providers; and |
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credit insurers. |
In addition, business information products and services are becoming more readily available,
principally due to the expansion of the Internet, greater availability of public data and the
emergence of new providers of business information products and services. Weak economic conditions
can result in customers seeking to utilize free or lower-cost information that is available from
alternative sources such as the Internet and European Commission sponsored projects like the
European Business Register. Intense competition could harm us by causing, among other things, price
reductions, reduced gross margins and loss of market share.
Our ability to continue to compete effectively will be based upon a number of factors
including:
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Our ability to communicate and demonstrate to our customers the value of our proprietary
DUNSRightTM quality process and, as a result, improve customer satisfaction; |
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our ability to attract local customers to the worldwide information services offered by
our unique database; |
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our ability to demonstrate value through our decision-making tools and integration
capabilities; |
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the reliability and quality of our information; |
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our brand perception; |
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our ability to continue to implement the Financial Flexibility component of our strategy
and effectively reallocate our spending to activities that drive revenue growth; |
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our ability to deliver business information through various media and distribution
channels in formats tailored to customer requirements; |
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our ability to attract and retain a high-performing workforce; |
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our ability to enhance our existing services or introduce new services; and |
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our ability to improve our International business model and data quality through the
successful management of strategic relationships in our International segment. |
We are undertaking various initiatives in our International segment that are critical to achieving
our aspiration, which may not be
successful.
The success of our initiatives in our International segment is important to our ability to
achieve our aspiration. These initiatives are primarily focused on improving our competitive
position while improving our operating margins in our International segment, both by increasing
revenue and lowering our expense base.
Examples of initiatives we are undertaking are:
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implementing specific process re-engineering projects designed to improve efficiency and
productivity in our business; and |
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optimizing revenue and profits realized by the sale of data collected by partner
organizations in certain markets. |
55
There can be no assurance that these or other initiatives we may undertake will be successful
in attaining a consistent and sustainable level of improved International financial performance.
For example, we may not reduce costs of our operations through re-engineering to the extent
expected due to challenges in implementing our technology plans, or the efforts by our partner
organizations to increase the value of the data they provide us may not result in significant
improvements in data quality.
If we fail to improve the financial performance of our International segment, the market value
of our common stock could be materially adversely affected.
Our operations in the International segment are subject to various risks associated with operations
in foreign countries.
Our success depends in part on our various operations outside the United States. For the three
months ended September 30, 2005 and 2004, our International segment accounted for 24% and 28% of
total revenue. For the nine months ended September 30, 2005 and 2004, our International segment
accounted for 25% and 30% of total revenue. Our International business is subject to many
challenges, the most significant being:
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our competition is primarily local, and our customers may have greater loyalty to our
local competitors; |
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credit insurance is a significant credit risk mitigation tool in certain markets, thus
reducing the demand for information-based credit risk mitigation tools, such as those
offered by us; and |
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in some markets, key data elements are generally available from public-sector sources,
thus reducing our data collection advantage. |
Our International strategy includes forming strategic relationships in certain markets with
third parties to improve our data quality. While we are applying methodical processes to ensure
these alliances will create a competitive advantage for us, there are no assurances that these
alliances will be successful.
The issue of data privacy is an increasingly important area of public policy in various
European markets, and we operate in an evolving regulatory environment that could adversely impact
aspects of our business.
Our operating results could also be negatively affected by a variety of other factors
affecting our foreign operations, many of which are beyond our control. These factors include
currency fluctuations, economic, political or regulatory conditions in a specific country or region, trade protection measures and other regulatory requirements. Additional
risks inherent in International business activities generally include, among others:
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longer accounts receivable payment cycles; |
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the costs and difficulties of managing international operations and alliances; |
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greater difficulty enforcing intellectual property rights; and |
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the need to comply with a broader array of regulatory and licensing requirements, the
failure of which could result in fines, penalties or business suspensions. |
Our results of operations may suffer if the economy weakens.
Demand for some of our products is influenced by economic trends. If the economy weakens, we
may experience a reduction in the demand for certain of our products as customers look for ways to
reduce their expenses.
Economic weakness may also result in certain of our customers going out of business or
combining with other companies. When companies combine, their post-consolidation spending on our
products is invariably less than their aggregate pre-consolidation spending. In addition, companies
may streamline their credit departments, thus reducing the number of users of our products.
Customers may also take longer to make spending decisions, causing us to expend greater resources
and divert sales resources from other opportunities, negotiate harder on price, and seek cheaper
alternatives to our products. In challenging economic times, price competition may increase, which
adversely impacts our revenue and profit margins.
56
We could be harmed by a failure in the integrity of our database.
The reliability of our products is dependent upon the integrity of the data in our global
database. We have in the past been subject to customer and third-party inquiries, complaints and
lawsuits regarding our data, including claims based on theories of negligence and libel. A failure
in the integrity of our database could harm us by exposing us to customer or third-party claims or
by causing a loss of customer confidence in our products.
Also, we have licensed, and we may license in the future, proprietary rights to third parties.
While we attempt to ensure that the quality of our brand is maintained by the business partners to
whom we grant nonexclusive licenses and by customers, they may take actions that could materially
and adversely affect the value of our proprietary rights or our reputation. In addition, it cannot
be assured that these licensees and customers will take the same steps we have taken to prevent
misappropriation of our solutions or technologies.
We rely on annual contract renewals.
We derive a substantial portion of our revenue from annual customer contracts. If we are
unable to renew a significant number of these contracts, our revenue and results of operations
would be harmed. In addition, our financial results from period to period may vary due to the
timing of customer contract renewals.
We deliver a significant majority of our products and services over the internet.
We rely on the internet in the delivery of our products and services. Our business will suffer
if we are unable to:
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develop products that are understandable and easy to use over the internet; |
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minimize disruptions in our service and other system failures that can occur while using
the internet and which would reduce customer satisfaction; |
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maintain cost effective distribution channels in support of increasing market penetration
both domestically and in international markets. |
We may lose key business assets, including loss of data center capacity or the interruption of
telecommunications links, the internet,
or
power sources.
Our operations depend on our ability, as well as that of third-party service providers to whom
we have outsourced several critical functions, to protect our data centers and related technology
against damage from fire, power loss, telecommunications failure, natural disasters, or other
disasters. The on-line services we provide are dependent on links to telecommunications providers.
In addition, we generate a significant amount of our revenue through telesales centers and websites
that we utilize in the acquisition of new customers, fulfillment of products and services and
responding to customer inquiries. Any damage to our data centers, failure of our telecommunications
links or inability to access these telesales centers or websites could cause interruptions in
operations that materially adversely affect our ability to meet customers requirements, resulting
in decreased revenue, net income and earnings per share.
We are involved in tax and legal proceedings that could have a material effect on us.
We are involved in tax and legal proceedings, claims and litigation that arise in the ordinary
course of business. As discussed in greater detail under Note 8 Contingencies (Legal Proceedings)
in Notes to Consolidated Financial Statements herein in Part I, Item 1 of this Form 10-Q, certain
of these matters could have a material effect on our results of operations, cash flows or financial
position.
57
Acquisitions may disrupt or otherwise have a negative impact on our business.
As part of our strategy, we may seek to acquire other complementary businesses, products and
technologies. Acquisitions are subject to the following risks:
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acquisitions may cause a disruption in our ongoing business, distract our management and
make it difficult to maintain our standards, controls and procedures; |
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we may not be able to integrate successfully the services, content, products and
personnel of any acquisition into our operations; and |
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we may not derive the revenue improvements, cost savings and other intended benefits of
any acquisition. |
Changes in the legislative, regulatory and commercial environments may adversely affect our ability
to collect, manage, aggregate and
use data.
Certain types of information we gather, compile and publish are subject to regulation by
governmental authorities in certain markets in which we operate, particularly in Europe. In
addition, there is increasing awareness and concern among the general public regarding marketing
and privacy matters, particularly as they relate to individual privacy interests and the ubiquity
of the Internet. These concerns may result in new laws and regulations. Compliance with existing
laws and regulations has not to date seriously affected our business, financial condition or
results of operations. Nonetheless, future laws and regulations with respect to the collection,
management and use of information, and adverse publicity or litigation concerning the commercial
use of such information, could affect our operations. This could result in substantial regulatory
compliance or litigation expense or a loss of revenue.
Italian Tax Legislation
In early 2005, regulations implementing new tax legislation became effective in Italy that
significantly increased the cost of conducting our Italian real estate data information business.
Specifically, the regulations increase data acquisition costs for Italian real estate information
and require that we pay a fee each time we resell or license that data. Through price increases and
reengineering efforts, we hope to continue to mitigate the effect of the legislation. Our revenue
from our real estate data business in Italy continues to be subject to a number of risks and
uncertainties due to (i) such tax legislation which could result in additional declines in customer
usage, as customers evaluate the related price increases; (ii) competitive pressures; and (iii)
future legislative actions that might further impact the economics of our operations.
Changes in the legislative or regulatory environments may adversely affect our benefits plans.
Last year, the United States District Court for the Southern District of Illinois affirmed its
earlier ruling that IBMs cash balance pension plan violated the age discrimination provisions of
ERISA. IBM has announced, however, that it will appeal this decision. Therefore, it is not possible
at this time to determine whether the IBM ruling will ultimately have any material effect on our
cash balance plan or our financial position.
Item 3. Quantitative and Qualitative Disclosures about Market Risk.
D&Bs market risks primarily consist of the impact of changes in currency exchange rates on
assets and liabilities, the impact of changes in the market value of certain of our investments and
the impact of changes in interest rates. Our 2004 consolidated financial statements included in
Item 7a. Quantitative and Qualitative disclosures About Market Risk of our Annual Report on Form
10-K provide a more detailed discussion of the market risks affecting operations. As of September
30, 2005, no material change had occurred in our market risks, compared with the disclosure in the
Form 10-K for the year ending December 31, 2004.
58
Item 4. Controls and Procedures.
Evaluation of Disclosure Controls
We evaluated the effectiveness of our disclosure controls and procedures (Disclosure
Controls) as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934
(Exchange Act) as of the end of the period covered by this report. This evaluation (Controls
Evaluation) was done with the participation of our Chief Executive Officer (CEO) and Chief
Financial Officer (CFO).
Disclosure Controls are controls and other procedures that are designed to ensure that
information required to be disclosed by us in the reports that we file or submit under the Exchange
Act is recorded, processed, summarized and reported within the time periods specified in the SECs
rules and forms. Disclosure controls and procedures include, without limitation, controls and
procedures designed to ensure that information required to be disclosed by us in the reports that
we file or submit under the Exchange Act is accumulated and communicated to our management,
including our CEO and CFO, as appropriate, to allow timely decisions regarding required disclosure.
Limitations on the Effectiveness of Controls
Our management, including our CEO and CFO, does not expect that our Disclosure Controls or our
internal control over financial reporting (Internal Control) will prevent all error and all
fraud. A control system, no matter how well conceived and operated, can provide only reasonable,
but not absolute, assurance that the objectives of a control system are met. Further, any control
system reflects limitations on resources, and the benefits of a control system must be considered
relative to its costs. Because of the inherent limitations in all control systems, no evaluation of
controls can provide absolute assurance that all control issues and instances of fraud, if any,
within D&B have been detected. These inherent limitations include the realities that judgments in
decision-making can be faulty and that breakdowns can occur because of simple error or mistake.
Additionally, controls can be circumvented by the individual acts of some persons, by collusion of
two or more people, or by management override of a control. A design of a control system is also
based upon certain assumptions about the likelihood of future events, and there can be no assurance
that any design will succeed in achieving its stated goals under all potential future conditions;
over time, controls may become inadequate because of changes in conditions, or the degree of
compliance with the policies or procedures may deteriorate. Because of the inherent limitations in
a cost-effective control system, misstatements due to error or fraud may occur and may not be
detected.
Conclusions regarding Disclosure Controls
Based upon our Controls Evaluation, our CEO and CFO have concluded that as of the end of the
quarter ended September 30, 2005, the Disclosure Controls are effective at the reasonable assurance
level.
Change in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting that occurred during
the third quarter of 2005 that have materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Information in response to this Item is included in Part I-Item I-Note 8 Contingencies
and is incorporated by reference into Part II of this quarterly report on Form 10-Q.
59
Item 2. Unregistered Sales of Equity Securities, and Use of Proceeds.
The following table provides information about purchases made by or on behalf of the Company
or our affiliated purchasers during the quarter ended September 30, 2005 of shares of equity that
are registered by the Company pursuant to Section 12 of the Exchange Act;
ISSUER PURCHASES OF EQUITY SECURITIES
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Total Number of |
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Total |
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Shares Purchased as |
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Maximum Number of |
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Number of |
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Average |
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Part of Publicly |
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Shares that May yet be |
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Shares |
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Price Paid |
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Announced Plans or |
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Purchased Under the |
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Period |
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Purchased(a) |
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per Share |
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Programs(a) |
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Plans or Programs(a)(b) |
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July 1 - 31, 2005 |
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338,700 |
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$ |
62.05 |
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338,700 |
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August 1 - 31, 2005 |
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279,475 |
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$ |
64.14 |
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279,475 |
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September 1 - 30,
2005 |
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377,000 |
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$ |
64.29 |
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377,000 |
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Total |
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995,175 |
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$ |
63.48 |
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995,175 |
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3,323,975 |
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(a) |
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During the three months ended September 30, 2005, we repurchased
201,681 share of stock for $12.5 million to mitigate the dilutive
effect of the shares issued under our stock incentive plans and
Employee Stock Purchase Plan. This program was announced in July 2003
and expires in September 2006. The maximum amount authorized under the
program is 6.0 million shares. Additionally, during the third quarter
of 2005, we repurchased 793,494 shares for $50.7 million related to a
previously announced $400 million two-year share repurchase program
approved by our Board of Directors in February, 2005. This program
expires in February, 2007. |
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(b) |
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Excludes shares that may be purchased under our two-year $400 million
share repurchase program approved by our Board of Directors and
announced in February, 2005. |
Item 6. Exhibits
Exhibit 31 Rule 13a-14(a)/15(d)-14(a) Certifications
Exhibit 31.1 Certification of Chief Executive Officer pursuant to Rule
13a-14(a)/15(d)-14(a) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
Exhibit 31.2 Certification of Chief Financial Officer pursuant to Rule
13a-14(a)/15(d)-14(a) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
Exhibit 32 Section 1350 Certifications
Exhibit 32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C. 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
Exhibit 32.2 Certification of Chief Financial Officer pursuant to 18 U.S.C. 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
60
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 thereunto duly authorized.
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THE
DUN & BRADSTREET CORPORATION |
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By: |
/s/ Sara Mathew
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Sara Mathew |
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Chief Financial Officer |
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Date: November 2, 2005
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By: |
/s/ Anastasios G. Konidaris
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Anastasios G. Konidaris |
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Principal Accounting Officer |
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Date: November 2, 2005
61