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SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
(Mark one)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 2002
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OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from to
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Commission file number 001-15967
THE DUN & BRADSTREET CORPORATION
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(Exact name of registrant as specified in its charter)
Delaware 22-3725387
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(State of Incorporation) (I.R.S. Employer Identification No.)
One Diamond Hill Road, Murray Hill, NJ 07974
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (908) 665-5000
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
Title of Class Shares Outstanding
-------------- at June 30, 2002
Common Stock, ----------------
par value $.01 per share 74,260,627
THE DUN & BRADSTREET CORPORATION
INDEX TO FORM 10-Q
PART I. FINANCIAL INFORMATION PAGE
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Item 1. Financial Statements
Consolidated Statements of Operations (Unaudited)
Three and Six Months Ended June 30, 2002 and 2001 3
Consolidated Balance Sheets (Unaudited)
June 30, 2002 and December 31, 2001 4
Consolidated Statements of Cash Flows (Unaudited)
Six Months Ended June 30, 2002 and 2001 5
Notes to Consolidated Financial Statements (Unaudited) 6-15
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 16-28
Item 3. Quantitative and Qualitative Disclosures About Market Risk 29
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 29
Item 6. Exhibits and Reports on Form 8-K 29
SIGNATURES 30
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The Dun & Bradstreet Corporation and Subsidiaries
Consolidated Statements of Operations (Unaudited)
Quarter Ended Year-to-Date
June 30, June 30,
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Amounts in millions, except per share data 2002 2001 2002 2001
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Operating Revenues $ 305.2 $ 320.7 $ 623.7 $ 678.3
- --------------------------------------------------------- ------------- -------------- -------------- --------------
Operating Costs:
Operating Expenses 102.2 115.8 211.0 247.3
Selling and Administrative Expenses 122.1 128.3 249.5 271.3
Depreciation and Amortization 19.9 23.8 39.4 48.6
Restructuring Expense - Net 30.9 28.8 30.9 28.8
Reorganization Costs - (7.0) - (7.0)
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Operating Costs 275.1 289.7 530.8 589.0
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Operating Income 30.1 31.0 92.9 89.3
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Non-Operating Income (Expense) - Net:
Interest Income 0.6 1.5 1.3 2.3
Interest Expense (4.9) (5.6) (9.9) (6.8)
Minority Interest Expense - - - (5.4)
Other Income (Expense) - Net (3.5) 34.8 (3.8) 34.5
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Non-Operating Income (Expense) - Net (7.8) 30.7 (12.4) 24.6
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Income before Provision for Income Taxes 22.3 61.7 80.5 113.9
Provision for Income Taxes 10.9 23.9 33.0 44.5
Equity in Net Losses of Affiliates, Net of Income Taxes (1.2) (1.1) (1.7) (1.8)
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Net Income $ 10.2 $ 36.7 $ 45.8 $ 67.6
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Basic Earnings Per Share of Common Stock $ 0.14 $ 0.46 $ 0.61 $ 0.84
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Diluted Earnings Per Share of Common Stock $ 0.13 $ 0.44 $ 0.59 $ 0.82
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Weighted Average Number of Shares Outstanding:
Basic 74.4 80.2 74.7 80.3
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Diluted 77.1 82.5 77.4 82.4
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The accompanying notes are an integral part of the consolidated financial statements.
The Dun & Bradstreet Corporation and Subsidiaries
Consolidated Balance Sheets (Unaudited)
June 30, December 31,
Dollar amounts in millions, except per share data 2002 2001
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Assets
Current Assets
Cash and Cash Equivalents $ 147.1 $ 145.3
Accounts Receivable---Net of Allowance of $21.5 in 2002 and $21.0 in 2001 280.8 317.8
Other Current Assets 94.0 117.1
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Total Current Assets 521.9 580.2
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Non-Current Assets
Property, Plant and Equipment, Net 141.9 158.0
Prepaid Pension Costs 364.9 333.7
Computer Software, Net 81.9 103.6
Goodwill, Net 145.6 139.6
Other Non-Current Assets 94.5 116.1
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Total Non-Current Assets 828.8 851.0
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Total Assets $ 1,350.7 $ 1,431.2
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Current Liabilities
Other Accrued and Current Liabilities $ 291.2 $ 332.7
Unearned Subscription Income 346.3 330.0
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Total Current Liabilities 637.5 662.7
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Pension and Postretirement Benefits 378.4 377.3
Long Term Debt 299.7 299.6
Other Non-Current Liabilities 106.1 111.2
Contingencies (Note 7)
Minority Interest 1.2 1.3
Shareholders' Equity
Preferred Stock, $.01 par value per share, authorized---10,000,000 shares;
--- outstanding---none
Series Common Stock, $.01 par value per share, authorized---10,000,000 shares;
--- outstanding---none
Common Stock, $.01 par value per share, authorized---200,000,000 and
400,000,000 shares for 2002 and 2001 respectively---issued---81,945,520 0.8 0.8
Unearned Compensation Restricted Stock (1.2) (1.8)
Capital Surplus 221.2 227.3
Retained Earnings 208.0 162.3
Treasury Stock, at cost, 7,684,893 and 5,067,235 shares for
2002 and 2001 respectively (242.8) (148.7)
Cumulative Translation Adjustment (202.6) (205.2)
Minimum Pension Liability (55.6) (55.6)
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Total Shareholders' Equity (72.2) (20.9)
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Total Liabilities and Shareholders' Equity $ 1,350.7 $ 1,431.2
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The accompanying notes are an integral part of the consolidated financial statements.
The Dun & Bradstreet Corporation and Subsidiaries
Consolidated Statements of Cash Flows (unaudited)
Six Months Ended June 30,
Dollar amounts in millions 2002 2001
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Cash Flows from Operating Activities:
Net Income from Continuing Operations $ 45.8 $ 67.6
Reconciliation of Net Income to Net Cash
Provided by Operating Activities:
Depreciation and Amortization 39.4 48.6
Gain from Sale of Businesses - (36.4)
Equity Losses in Excess of Dividends Received from Affiliates 1.7 1.8
Restructuring Expense, Net and Other Asset Impairments 30.9 28.8
Decrease in Accounts Receivable 40.8 40.7
Net Decrease in Other Current Assets 0.8 13.2
Deferred Revenue from RMS Agreement (3.5) 35.4
Deferred Income Taxes 13.8 1.1
Accrued Income Taxes, Net 5.5 1.2
Net Increase in Long Term Liabilities 0.4 5.1
Net Increase in Other Long Term Assets (21.5) (29.5)
Net Increase in Unearned Subscription Income 12.4 28.4
Net Decrease in Other Accrued and Current Liabilities (67.4) (56.3)
Other 6.0 5.0
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Net Cash Provided by Operating Activities: 105.1 154.7
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Cash Flows from Investing Activities:
Proceeds from Sales of Real Estate 21.5 -
Proceeds from Sale of Business - 76.4
Payments for Acquisition of Business - (16.6)
Capital Expenditures (6.1) (8.5)
Additions to Computer Software and Other Intangibles (15.0) (18.7)
Investments in Unconsolidated Affiliates (0.9) (8.9)
Other (1.5) 3.8
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Net Cash (Used in) Provided by Investing Activities: (2.0) 27.5
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Cash Flows from Financing Activities:
Payments for Purchase of Treasury Shares (111.3) (26.5)
Net Proceeds from Stock Plans 7.8 10.9
Decrease in Commercial Paper Borrowings - (49.5)
Repayment of Minority Interest Obligations - (300.0)
Increase in Long-Term Borrowings - 299.6
Other 0.5 (1.9)
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Net Cash Used in Financing Activities (103.0) (67.4)
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Effect of Exchange Rate Changes on Cash and Cash Equivalents 1.7 0.3
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Increase in Cash and Cash Equivalents 1.8 115.1
Cash and Cash Equivalents, Beginning 145.3 70.1
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Cash and Cash Equivalents, End $ 147.1 $ 185.2
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Supplemental Disclosure of Cash Flow information:
Cash Paid Year to Date for:
Income Taxes, Net of refunds $ 12.5 $ 35.6
Interest and Minority Interest Expense $ 9.3 $ 5.7
The accompanying notes are an integral part of the consolidated financial statements.
THE DUN & BRADSTREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1 - Interim Consolidated Financial Statements
These interim consolidated financial statements have been prepared in
accordance with the instructions to Form 10-Q and should be read in conjunction
with the consolidated financial statements and related notes of The Dun &
Bradstreet Corporation's ("D&B" or the "Company") 2001 Annual Report on Form
10-K. The consolidated results for interim periods are not necessarily
indicative of results for the full year or any subsequent period. In the opinion
of management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation of financial position, results of
operations and cash flows at the dates and for the periods presented have been
included. In the Supplemental Disclosure of Cash Flow Information reported in
the Company's Form 10-Q for the quarter ended March 31, 2002, cash paid year to
date 2002 for Interest and Minority Interest Expense was presented as $4.0
million and should have been $9.2 million.
Note 2 - Recent Accounting Pronouncements
Effective January 1, 2002, the Company adopted the Statement of Financial
Accounting Standards No. 142 (SFAS No. 142), "Goodwill and Other Intangible
Assets." SFAS No. 142 addresses the financial accounting and reporting for
intangible assets acquired individually or with a group of other assets (but not
those acquired in a business combination) at acquisition. SFAS No. 142 also
addresses financial accounting and reporting for goodwill and other intangible
assets subsequent to their acquisition. Under the new rules, the Company is no
longer required to amortize goodwill and other intangible assets with indefinite
lives. Rather, the Company's goodwill is subject to periodic testing for
impairment at the reporting unit level. D&B considers its operating segments,
North America, Europe/Africa/Middle East ("Europe") and Asia Pacific/Latin
America ("APLA"), as its reporting units under the definitions of SFAS No. 142
for consideration of potential impairment of intangible and goodwill balances.
The Company performed the impairment test required by the new standard on the
recorded balance of goodwill as of December 31, 2001, in the amount of $139.6
million and determined that no charge for impairment was required.
The adoption of SFAS No. 142 resulted in a $1.3 million reduction in
amortization expense in the second quarter of 2002 compared to the same period
in 2001. For the first half of 2002, the reduction was $2.6 million compared to
the first half of 2001. The full year impact in 2002 is expected to be a
reduction of $5.3 million in amortization expense.
The pro forma impact of this accounting policy change is outlined in the
table below:
Three Months Ended Six Months Ended June
Dollar amounts in millions, except June 30, June 30,
per share data
-------------------------- -------------------------
2002 2001 2002 2001
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Reported Net Income $ 10.2 $36.7 $45.8 $ 67.6
Add Back: Goodwill Amortization
- 1.3 - 2.6
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Adjusted Net Income $ 10.2 $38.0 $45.8 $70.2
=========== =========== ========== ==========
Basic EPS:
Reported Net Income $ 0.14 $ 0.46 $ 0.61 $ 0.84
Add Back: Goodwill
Amortization - 0.02 - 0.04
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Adjusted Net Income $ 0.14 $ 0.48 $ 0.61 $ 0.88
=========== =========== ========== ==========
Diluted EPS:
Reported Net Income $ 0.13 $ 0.44 $ 0.59 $0.82
Add Back: Goodwill
Amortization - 0.02 - 0.04
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Adjusted Net Income $ 0.13 $ 0.46 $ 0.59 $ 0.86
=========== =========== ========== ==========
SFAS No. 142 also provides that intangible assets that have finite useful
lives will continue to be amortized over their useful lives, but those lives
will no longer be limited to 40 years. SFAS No. 142 supersedes APB Opinion No.
17, "Intangible Assets." Other intangible assets of $9.2 million at December 31,
2001, that continue to be amortized, have been reclassified and are now included
in Other Non-Current Assets on the Balance Sheet.
On January 1, 2002, the Company adopted Statement of Financial Accounting
Standards No. 144 (SFAS No. 144), "Accounting for the Impairment or Disposal of
Long-Lived Assets." This statement addresses financial accounting and reporting
for the impairment of long-lived assets. As discussed in Note 3 - Impact of
Implementation of the "Blueprint for Growth" Strategy - during the second
quarter of 2002, the Company incurred impairment losses of $10.6 million related
to assets being sold or abandoned during the quarter as a result of actions
taken under its financial flexibility program.
Note 3 - Impact of Implementation of the "Blueprint for Growth" Strategy
"Blueprint for Growth" Strategy
In October 2000, D&B announced a new business strategy, the Blueprint for
Growth, designed to transform D&B into a growth company with an important
presence on the Web, while also delivering shareholder value during the
transformation. The implementation of the Blueprint for Growth requires
significant investments. These investments include leveraging the brand through
advertising, enhancing the current business by expanding and improving the
Company's database, reinvigorating current products, creating new value-added
products and solutions, further developing the B2B e-business, and building a
winning culture by enabling and strengthening our leadership and continuing to
promote and add leaders. In order to fund these investments, D&B has identified
opportunities to reallocate spending in order to invest for growth and deliver
shareholder value. D&B also reviewed its non-core businesses and assets with a
view to converting them into cash.
Restructuring
In April 2002, the Company announced the third phase of its financial
flexibility program. To create a more efficient business model, the Company will
continue consolidating functions and streamlining processes, automating data
collection and fulfillment functions, migrating revenue to the web, and
outsourcing select activities. As shown in the table below, during the second
quarter of 2002, the Company incurred a pre-tax restructuring charge of $30.9
million in connection with these actions. The charge includes $18.6 million for
severance, $10.6 million for the write-off of assets which were sold or
abandoned (including $9.7 million resulting from the outsourcing action
discussed below), and $1.7 million for lease termination obligations.
As part of this third phase of the financial flexibility program, the
Company will outsource certain functions to Computer Sciences Corporation
("CSC"). Under the terms of the agreement, data center operations, technology
help desk and network management functions in the United States and in the
United Kingdom will transition to CSC. In addition, as part of the agreement,
CSC acquired the Company's data center and print mail facility located in
Berkeley Heights, New Jersey and related assets for $10 million which management
considered the fair value for the assets. This resulted in the $9.7 million
impairment loss noted above. In August 2002, 350 D&B employees transitioned to
CSC.
The first phase of financial flexibility began in the fourth quarter of
2000 and the second phase began in the second quarter of 2001. For the first
phase of the program, the Company recorded a pre-tax restructuring charge of
$41.5 million in the fourth quarter of 2000 in order to globalize administrative
functions, streamline data collection and fulfillment, rationalize sales and
marketing functions and consolidate and simplify technology functions. During
the second quarter of 2001, the Company reversed $4.0 million of the 2000
restructuring charge. The Company determined that severance for approximately 50
employees would not be utilized and also lowered its estimate of its remaining
lease termination liabilities. In the second quarter of 2001, the Company
recorded a pre-tax restructuring charge of $32.8 million to reengineer
administrative functions and institute common business practices worldwide for
the second phase of the financial flexibility program.
As of June 30, 2002, D&B has terminated approximately 1,700 of the
employees affected under all three phases of the financial flexibility program.
Approximately 1,200 additional employees worldwide will be terminated in
connection with the third phase, including the 350 employees that transitioned
to CSC as mentioned above. This brings the total number of employees reduced
from the core business as a result of the three phases of this program since its
inception in October 2000, to approximately 2,900 and positions eliminated to
3,200, which includes 300 open positions.
The restructuring reserves and utilization to date were as follows:
------------------------------------
(amounts in millions) Original 2002 Balance at
Charge Payments/ 6/30/2002
Write-offs
------------------------------------
2002 Restructuring Charge
Severance and Termination $18.6 $(.7) $17.9
Asset Write-Offs 10.6 (10.6) -
Lease Termination Obligations 1.7 - 1.7
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$30.9 $(11.3) $19.6
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(amounts in millions) Original Balance at 2002 Balance at
Charge 12/31/2001 Payments 6/30/2002
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2001 Restructuring Charge
Severance and Termination $20.7 $19.2 $(11.8) $7.4
Asset Write-Offs 8.9 - - -
Lease Termination Obligations 3.2 1.6 (.3) 1.3
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$32.8 $20.8 $(12.1) $8.7
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2000 Restructuring Charge
Severance and Termination $28.2 $4.4 $(2.7) $1.7
Asset Write-Offs 4.5 - - -
Lease Termination Obligations 8.8 4.0 (.6) 3.4
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$41.5 $8.4 $(3.3) $5.1
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The Company completed all the actions contemplated under the first phase of
its financial flexibility program as of the end of 2001 and completed the
remainder of the actions under the second phase as of June 30, 2002. The
remaining accruals relate to future payments to be made in accordance with the
Company's severance policies and for lease termination obligations for actions
that have already been taken.
Note 4 - Notes Payable and Indebtedness
The Company's borrowings at June 30, 2002 and December 31, 2001, including
interest rate swaps designated as hedges, are summarized below:
(amounts in millions) 2002 2001
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Fair value of long term fixed rate notes... $300.3 $ 297.3
Fair value of interest rate swaps.......... (.6) 2.3
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Long Term Debt........................ $299.7 $ 299.6
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Note 5 - Reconciliation of Weighted Average Shares
Three Months Ended Six Months Ended
June 30, June 30,
------------------------- ------------------------
(share data in thousands) 2002 2001 2002 2001
---- ---- ---- ----
Weighted average number of shares-basic 74,404 80,246 74,693 80,259
Dilutive effect of shares issuable under stock options,
restricted stock and performance share plans 2,682 2,128 2,672 2,028
Adjustment of shares applicable to stock options exercised during
the period and performance share plans 40 133 74 148
--------- --- -------- ---
Weighted average number of shares-diluted 77,126 82,507 77,439 82,435
====== ====== ====== ======
During the second quarter of 2002, the Company repurchased 425,900
shares for $16.1 million to mitigate the dilutive effect of the shares issued
under stock incentive plans and in connection with its Employee Stock Purchase
Plan. During the first half of 2002, D&B has repurchased 670,700 shares for
$26.2 million for this purpose. Also, during the first quarter of 2002, the
Company had repurchased 2.5 million shares at market prices totaling $85.1
million, in a privately negotiated block trade.
Options to purchase 43,425 and 108,100 shares of Common Stock at June 30,
2002 and 2001, respectively, were not included in the computation of diluted
earnings per share because the options' exercise prices were greater than the
average market price of the Common Stock. The Company's options generally expire
10 years after the initial grant date.
Note 6 - Comprehensive Income
The Company's total comprehensive income for the three-month and six-month
periods ended June 30 was as follows:
Three Months Ended Six Months Ended
June 30, June 30,
------------------------ ---------------------
(amounts in millions)
2002 2001 2002 2001
---- ---- ---- ----
Net income $10.2 $36.7 $45.8 $67.6
Other comprehensive income (loss) -
Foreign currency translation adjustment 2.1 (11.8) 2.6 (3.5)
Unrealized losses on investments - - (0.2) (0.1)
------ -- ------ - --------- --- -----
Total comprehensive income $12.3 $24.9 $48.2 $64.0
====== ====== ====== =====
Note 7 - Contingencies
The Company and its subsidiaries are involved in tax and legal proceedings,
claims and litigation arising in the ordinary course of business. Management
periodically assesses the Company's liabilities and contingencies in connection
with these matters based upon the latest information available. For those
matters where it is probable that the Company has incurred a loss and the loss
or range of loss can be reasonably estimated, the Company has recorded reserves
in the consolidated financial statements. In other instances, because of the
uncertainties related to both the probable outcome and amount or range of loss,
management is unable to make a reasonable estimate of a liability, if any. As
additional information becomes available, the Company adjusts its assessment and
estimates of such liabilities accordingly.
Based on its review of the latest information available, in the opinion of
management, the ultimate liability of the Company in connection with pending tax
and legal and proceedings, claims and litigation will not have a material effect
on the Company's results of operations, cash flows or financial position, with
the possible exception of the matters described below.
In order to understand the Company's exposure to the potential liabilities
described below, it is important to understand the relationship between the
Company and Moody's Corporation ("Moody's"), and the Company and its
predecessors and other parties who, 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 through a spin-off separated into three separate public companies,
The Dun & Bradstreet Corporation, ACNielsen Corporation ("ACNielsen") and
Cognizant Corporation ("Cognizant") (the "1996 Distribution"). In June 1998, The
Dun & Bradstreet Corporation through a spin-off separated into two separate
public companies, The Dun & Bradstreet Corporation and R.H. Donnelley
Corporation (the "1998 Distribution"). During 1998, Cognizant through a spin-off
separated into two separate public companies, IMS Health Incorporated ("IMS")
and Nielsen Media Research, Inc. ("NMR"). In September 2000, The Dun &
Bradstreet Corporation ("Old D&B") through a spin-off separated into two
separate public companies, the Company and Moody's (the "2000 Distribution".)
Tax Matters
Old D&B and its predecessors had entered into global tax planning
initiatives in the normal course of business, principally through tax-free
restructurings of both their foreign and domestic operations. The status of
Internal Revenue Service ("IRS") reviews of these initiatives is summarized
below.
Pursuant to a series of agreements, as between themselves, IMS and NMR are
jointly and severally liable to pay one-half, and the Company and Moody's are
jointly and severally liable to pay the other half, of any payments for taxes
and accrued interest resulting from unfavorable IRS rulings on certain tax
matters (excluding the matter described below as "Amortization Expense
Deductions" for which the Company and Moody's are solely responsible) and
certain other potential tax liabilities after the Company and/or Moody's pays
the first $137 million, which amount was paid in connection with the matter
described below as "Utilization of Capital Losses".
In connection with the 2000 Distribution and pursuant to the terms of the
related Distribution Agreement, the Company and Moody's have, between
themselves, agreed to each be financially responsible for 50% of any potential
liabilities that may arise to the extent such potential liabilities are not
directly attributable to their respective business operations.
Utilization of Capital Losses -1989-1990. The IRS completed its review of the
utilization of certain capital losses generated during 1989 and 1990 and on June
26, 2000, issued a formal assessment. On May 12, 2000, an amended tax return was
filed for the 1989 and 1990 tax periods, which reflected $561.6 million of tax
and interest due. Old D&B paid the IRS approximately $349.3 million of this
amount on May 12, 2000 and IMS paid the IRS approximately $212.3 million on May
17, 2000. The payments were made to the IRS to stop further interest from
accruing. Notwithstanding the filing and payment, the Company is contesting the
IRS's formal assessment and would also contest the assessment of amounts, if
any, in excess of the amounts paid. Old D&B has filed a petition for a refund in
the U.S. District Court on September 21, 2000.
Royalty Expense Deductions - 1994-1996. During the second quarter of this year,
the Company received a Notice of Proposed Adjustment from the IRS with respect
to a transaction entered into in 1993. In this Notice, the IRS proposed to
disallow certain royalty expense deductions claimed by Old D&B on its 1994, 1995
and 1996 tax returns. The IRS previously concluded an audit of this transaction
for taxable years 1993 and 1994 and did not disallow any similarly claimed
deductions. The Company disagrees with the position taken by the IRS in its
Notice and has filed a responsive brief to this effect with the IRS. If the IRS
were to issue a formal assessment consistent with the Notice and prevail, then
the Company would be required to pay the assessment. If the Company were to
challenge the assessment in U.S. District Court rather than in U.S. Tax Court,
then a payment of the disputed amounts would be required in connection with such
challenge. The Company estimates that its share of the required payment to the
IRS would be up to $48 million ($42 million net of associated tax benefits).
Amortization Expense Deductions - 1997-2001. The IRS has requested documentation
with respect to a transaction executed in 1997 that produces amortization
expense deductions. While the Company believes the deductions are appropriate,
it is possible that the IRS could ultimately challenge them and issue an
assessment. If the IRS were to prevail or the Company were to challenge any such
assessment in U.S. District Court, management estimates that the Company's cash
payment to the IRS with respect to deductions claimed to date could be up to $38
million ($35 million net of associated tax benefits). This transaction is
scheduled to expire in 2012, and, unless earlier terminated by the Company, the
Company's cash exposure (based on current interest rates and tax rates) would
increase at a rate of approximately $1.5 million per quarter as future
amortization expenses are deducted.
* * *
The Company has considered the foregoing tax matters and the merits of its
legal defenses and the various contractual obligations in its overall assessment
of potential tax liabilities and believes it has adequate reserves recorded in
the consolidated financial statements for its share of its current exposures in
these matters.
Legal Proceedings
Information Resources, Inc. On July 29, 1996, Information Resources, Inc.
("IRI") filed a complaint in the United States District Court for the Southern
District of New York, naming as defendants R.H. Donnelley Corporation
("Donnelley"), A.C. Nielsen Company (a subsidiary of ACNielsen Corporation) 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.
The complaint alleges various violations of United States antitrust laws,
including alleged violations of Sections 1 and 2 of the Sherman Act. The
complaint also alleges a claim of tortious interference with a contract and a
claim of tortious interference with a prospective business relationship. These
claims relate to the acquisition by defendants of Survey Research Group Limited
("SRG"). IRI alleges SRG violated an alleged agreement with IRI when it agreed
to be acquired by the defendants and that the defendants induced SRG to breach
that agreement.
IRI's complaint alleges damages in excess of $350 million, which amount IRI
asked to be trebled under antitrust laws. IRI also seeks punitive damages in an
unspecified amount. No amount in respect of these alleged damages has been
accrued in the consolidated financial statements of the Company.
In connection with the 1996 Distribution, Cognizant, ACNielsen and
Donnelley entered into an Indemnity and Joint Defense Agreement (the "Indemnity
and Joint Defense Agreement") pursuant to which they have agreed: (i) to certain
arrangements allocating potential liabilities ("IRI Liabilities") that may arise
out of or in connection with the IRI action and (ii) to conduct a joint defense
of such action. In particular, the Indemnity and Joint Defense Agreement
provides that ACNielsen will assume exclusive liability for IRI Liabilities up
to a maximum amount to be calculated at such time such liabilities, if any,
become payable (the "ACN Maximum Amount"), and that Donnelley and Cognizant will
share liability equally for any amounts in excess of the ACN Maximum Amount. The
ACN Maximum Amount will be determined by an investment banking firm as the
maximum amount which ACNielsen is able to pay after giving effect to (i) any
plan submitted by such investment bank which is designed to maximize the claims
paying ability of ACNielsen without impairing the investment banking firm's
ability to deliver a viability opinion (but which will not require any action
requiring stockholder approval), and (ii) payment of related fees and expenses.
For these purposes, financial viability means the ability of ACNielsen, after
giving effect to such plan, the payment of related fees and expenses, and the
payment of the ACN Maximum Amount, to pay its debts as they become due and to
finance the current and anticipated operating and capital requirements of its
business, as reconstituted by such plan, for two years from the date any such
plan is expected to be implemented. In 2001, ACNielsen merged with VNU N.V.
Pursuant to the Indemnity and Joint Defense Agreement, VNU N.V. is to be
included for purposes of determining the ACN Maximum Amount, and VNU N.V.
assumed ACNielsen's liabilities under that agreement.
In connection with the 1998 Distribution, Old D&B and Donnelley entered
into an agreement (the "1998 Distribution Agreement") whereby Old D&B assumed
all potential liabilities of Donnelley arising from the IRI action.
IMS and NMR are each jointly and severally liable for all Cognizant
liabilities under the Indemnity and Joint Defense Agreement.
Under the terms of the 2000 Distribution, the Company undertook to be
jointly and severally liable with Moody's for Old D&B's obligations to Donnelley
under the 1998 Distribution Agreement, including any liabilities arising under
the Indemnity and Joint Defense Agreement. However, as between themselves, each
of the Company and Moody's will be responsible for 50% of any payments to be
made with respect to the IRI action pursuant to the 1998 Distribution Agreement,
including legal fees or expenses related thereto.
Management is unable to predict at this time the final outcome of the IRI
action or whether the resolution of this matter could materially affect the
Company's results of operations, cash flows or financial position.
IMS/NMR Arbitration. Subsequent to making its May 2000 payment to the IRS
referred to above under the caption "Tax Matters--Utilization of Capital
Losses--1989-1990"), IMS sought partial reimbursement from NMR under their 1998
Distribution Agreement (the "IMS/NMR Agreement"). Neither the Company nor
Donnelley was a party to the IMS/NMR Agreement. NMR paid IMS less than the
amount sought by IMS under the IMS/NMR Agreement and, in 2001, IMS filed an
arbitration proceeding against NMR to recover the difference. IMS sought to
include Donnelley in this arbitration, arguing that if NMR should prevail in its
interpretation of the IMS/NMR Agreement, then IMS could seek the same
interpretation in an alternative claim against Donnelley. During the first
quarter of 2002, the arbitration panel ruled that Donnelley is a proper party to
the arbitration. If NMR should prevail in the arbitration against IMS and, in
turn, IMS should prevail against Donnelley, then the Company believes that the
additional liability to Donnelley would be approximately $15 million, net of tax
benefits. As noted above under the 2000 Distribution Agreement, the Company is
responsible for one-half of any amount for which Donnelley is liable in this
matter. The Company believes that the claim asserted against Donnelley by IMS is
without merit. No amount in respect of this matter has been accrued in the
consolidated financial statements of the Company
Note 8 - Investment in Unconsolidated Affiliates
During the second quarter of 2002, the Company exited Avantrust LLC,
its joint venture with American International Group, Inc. ("AIG"). As the market
opportunity for e-marketplaces originally envisioned for Avantrust, LLC never
developed, AIG and D&B agreed that the focus of Avantrust, LLC should shift to
selling and marketing AIG solutions. The Company had an ownership share of
41.8%, which had been accounted for under the equity method. The equity losses
recorded were $1.2 million and $1.7 million in the second quarter and first half
of 2002, respectively, and were $1.1 million and $1.8 million in the same
periods a year ago. As a result of exiting this joint venture, the Company
recorded a $2.9 million pre-tax write-off of the remaining investment in Other
Income (Expense) - Net.
Note 9 - Sale of Property
During the second quarter of 2002, the Company completed the sale of
its Murray Hill, NJ facility and received proceeds of $11.5 million. During the
fourth quarter of 2001, the Company had announced its intention to sell the
building and consequently wrote it down to its net realizable value, recognizing
a pre-tax impairment loss of $6.5 million at that time.
As discussed in detail in Note 3 - Impact of Implementation of the
"Blueprint for Growth" Strategy, during the second quarter, D&B sold its
Berkeley Heights, New Jersey facility and related assets to CSC for $10 million.
Note 10 - Subsequent Event
In August 2002, the Company acquired Data House, an Italian provider
of real estate information that is used in Italy by banks, notaries, real estate
agencies and corporations for $22 million from Seat Pagine Gialle S.p.A.. The
acquisition will enhance the Company's current business by positioning the
Company for growth in serving the Italian banking sector. The acquisition will
be funded by cash on hand.
Note 11 - Segment Information
Quarter Ended Year-to-Date
June 30, June 30,
-------------------------- ---------------------------
Amounts in millions 2002 2001 2002 2001
- --------------------------------------------------------------- ----------- ----------- ------------ -----------
Operating Revenues:
North America $ 215.5 $ 217.9 $ 459.8 $ 481.2
Europe 81.2 87.7 147.7 168.0
Asia Pacific / Latin America 8.5 15.1 16.2 29.1
----------- ----------- ------------ -----------
Consolidated Operating Revenues $ 305.2 $ 320.7 $ 623.7 $ 678.3
----------- ----------- ------------ -----------
Operating Income (Loss):
North America $ 66.3 $ 63.3 $ 151.1 $ 148.1
Europe 10.8 5.2 6.7 (2.2)
Asia Pacific / Latin America 2.3 1.0 1.6 (2.3)
----------- ----------- ------------ -----------
Total Divisions 79.4 69.5 159.4 143.6
Corporate and Other (49.3) (38.5) (66.5) (54.3)
----------- ----------- ------------ -----------
Consolidated Operating Income $ 30.1 $ 31.0 $ 92.9 $ 89.3
----------- ----------- ------------ -----------
Supplemental Geographic and Product Line Information:
Quarter Ended Year-to-Date
June 30, June 30,
-------------------------- ---------------------------
Geographic Revenue 2002 2001 2002 2001
----------- ------------ ----------- -----------
United States $ 208.1 $ 210.6 $ 445.9 $ 466.7
International 97.1 110.1 177.8 211.6
----------- ----------- ------------ -----------
Consolidated Operating Revenues $ 305.2 $ 320.7 $ 623.7 $ 678.3
----------- ----------- ------------ -----------
Product Line Revenues
North America:
Risk Management Solutions $ 150.5 $ 147.0 $ 310.0 $ 308.8
Sales & Marketing Solutions 59.8 55.6 138.8 122.7
Supply Management Solutions 5.2 5.3 11.0 11.2
----------- ----------- ------------ -----------
Core Businesses 215.5 207.9 459.8 442.7
Receivables Management Services and Other Divested Businesses - 10.0 - 38.5
----------- ----------- ------------ -----------
Total North America 215.5 217.9 459.8 481.2
----------- ----------- ------------ -----------
Europe:
Risk Management Solutions 63.2 64.6 117.1 121.2
Sales & Marketing Solutions 15.0 14.8 26.2 28.2
Supply Management Solutions 3.0 0.6 4.4 1.2
----------- ----------- ------------ -----------
Core Businesses 81.2 80.0 147.7 150.6
Receivables Management Services and Other Divested Businesses - 7.7 - 17.4
----------- ----------- ------------ -----------
Total Europe 81.2 87.7 147.7 168.0
----------- ----------- ------------ -----------
APLA:
Risk Management Solutions 6.6 5.5 12.5 11.0
Sales & Marketing Solutions 1.9 2.1 3.7 3.5
Supply Management Solutions - - - -
----------- ----------- ------------ -----------
Core Businesses 8.5 7.6 16.2 14.5
Receivables Management Services and Other Divested Businesses - 7.5 - 14.6
----------- ----------- ------------ -----------
Total APLA 8.5 15.1 16.2 29.1
----------- ----------- ------------ -----------
Consolidated Operating Revenues:
Risk Management Solutions 220.3 217.1 439.6 441.0
Sales & Marketing Solutions 76.7 72.5 168.7 154.4
Supply Management Solutions 8.2 5.9 15.4 12.4
----------- ----------- ------------ -----------
Core Businesses 305.2 295.5 623.7 607.8
Receivables Management Services and Other Divested Businesses - 25.2 - 70.5
----------- ----------- ------------ -----------
Consolidated Operating Revenues $ 305.2 $ 320.7 $ 623.7 $ 678.3
----------- ----------- ------------ -----------
Assets: Jun 2002 Dec 2001
----------- -----------
North America $ 340.1 $ 387.7
Europe 424.2 447.2
Asia Pacific / Latin America 24.6 26.5
----------- -----------
Total Divisions 788.9 861.4
Corporate and Other (primarily domestic pensions and taxes) 561.8 569.8
----------- -----------
Consolidated Assets $ 1,350.7 $ 1,431.2
----------- -----------
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Overview
The Dun & Bradstreet Corporation's ("D&B" or the "Company") discussion and
analysis of its financial condition and results of operations for the second
quarter of 2002 are based upon the Company's unaudited consolidated financial
statements for that period. The consolidated results for interim periods are not
necessarily indicative of results for the full year or any subsequent period.
These financial statements should be read in conjunction with the consolidated
financial statements and related notes filed with the Securities and Exchange
Commission on the Company's Form 10-K for the year ended December 31, 2001, in
which the financial statements were prepared in accordance with accounting
principles generally accepted in the United States of America.
D&B, which provides the information, tools and expertise to help customers
Decide with Confidence, is managed on a geographical basis with three operating
segments: North America, Europe/Africa/Middle East ("Europe") and Asia
Pacific/Latin America ("APLA"). In each segment, the Company is focused on its
core product lines: Risk Management Solutions, Sales & Marketing Solutions, and
Supply Management Solutions. In this discussion of the Company's results,
revenues from Receivable Management Services, which was sold in the second
quarter of 2001, and all other divested businesses have been reclassified as
"Receivable Management Services and Other Divested Businesses" and certain
prior-period amounts have been adjusted to conform to the 2002 presentation.
Other divested businesses also include results of the Australia/New Zealand
operation, sold in the third quarter of 2001, and operations in other countries
in APLA that underwent business model changes. D&B evaluates performance and
allocates resources based on segment revenues and operating income. For
management reporting purposes, restructuring charges, transition costs and other
transactions incurred in connection with D&B's Blueprint for Growth Strategy are
not allocated to any of the business segments.
The following table sets forth condensed financial information derived from
the Company's consolidated financial statements for the periods indicated:
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------- ---------------------------
Amounts in millions, except per share data 2002 2001 2002 2001
- ------------- ----------- --------------------------------- ----------- ----------- ----------- -----------
Operating Revenues:
North America $215.5 $207.9 $459.8 $442.7
Europe 81.2 80.0 147.7 150.6
Asia Pacific/Latin America 8.5 7.6 16.2 14.5
----------- ----------- ----------- -----------
Total Core Revenues 305.2 295.5 623.7 607.8
Receivable Management Services and
Other Divested Businesses - 25.2 - 70.5
----------- ----------- ----------- -----------
Consolidated Operating Revenues $305.2 $ 320.7 $ 623.7 $678.3
- ----------------------------------------------------------- ----------- ----------- ----------- -----------
Operating Income (Loss):
North America $ 66.3 $ 63.3 $151.1 $ 148.1
Europe 10.8 5.2 6.7 (2.2)
Asia Pacific/Latin America 2.3 1.0 1.6 (2.3)
----------- ----------- ----------- -----------
Total Divisions 79.4 69.5 159.4 143.6
Corporate and Other (1) (49.3) (38.5) (66.5) (54.3)
- ------------- --------------------------------------------- ----------- ----------- ----------- -----------
Consolidated Operating Income $ 30.1 $ 31.0 $ 92.9 $ 89.3
- ----------------------------------------------------------- ----------- ----------- ----------- -----------
Non-Operating Income (Expense) - Net (2) (7.8) 30.7 (12.4) 24.6
Provision for Income Taxes 10.9 23.9 33.0 44.5
Equity in Net Losses of Affiliates, Net of Income Taxes (1.2) (1.1) (1.7) (1.8)
- ----------------------------------------------------------- ----------- ----------- ----------- -----------
Net Income $ 10.2 $ 36.7 $ 45.8 $ 67.6
- ----------------------------------------------------------- ----------- ----------- ----------- -----------
Basic Earnings Per Share of Common Stock $ 0.14 $ 0.46 $ 0.61 $ 0.84
- ----------------------------------------------------------- ----------- ----------- ----------- -----------
Diluted Earnings Per Share of Common Stock $ 0.13 $ 0.44 $ 0.59 $ 0.82
- ----------------------------------------------------------- ----------- ----------- ----------- -----------
(1) Corporate and Other is comprised of:
Three Months Six Months
Ended June 30, Ended June 30,
Amounts in millions 2002 2001 2002 2001
---- ---- ---- ----
Corporate Costs $ (18.4) $ (16.7) $ (35.6) $ (32.5)
Restructuring Expense - Net (30.9) (28.8) (30.9) (28.8)
Reorganization Costs - 7.0 - 7.0
------------ ------------ ----------- ------------
Total Corporate and Other $ (49.3) $ (38.5) $ (66.5) $ (54.3)
============ ============ =========== ============
(2) Non-Operating Income (Expense) includes:
Three Months Six Months
Ended June 30, Ended June 30,
--------------- --------------
Amounts in millions 2002 2001 2002 2001
---- ---- ---- ----
Gain on the Sale of the Receivable
Management Services Business - $ 36.4 - $ 36.4
To facilitate an understanding of D&B's results, certain significant events
should be considered, including:
Impact of "Blueprint for Growth" Strategy (See Note 3 to the consolidated
financial statements)
In October 2000, D&B launched a new business strategy, the Blueprint for
Growth, designed to transform D&B into a growth company with an important
presence on the Web, while also delivering shareholder value during the
transformation. The implementation of the Blueprint for Growth requires
significant investments. These investments include leveraging the brand through
advertising, enhancing the current business by expanding and improving the
Company's database, reinvigorating current products, creating new value-added
products and solutions, further developing the B2B e-business, and building a
winning culture by enabling and strengthening our leadership and continuing to
promote and add leaders. In order to fund these investments, D&B has created a
flexible business model whereby the Company has, and will continue to, identify
opportunities to reallocate spending in order to invest for growth and deliver
shareholder value.
Financial Flexibility
In April 2002, the Company announced the third phase of its financial
flexibility program which is expected to reduce expenses to capture
approximately $80 million in additional funds that can be reallocated. To create
a more efficient business model, the Company will continue consolidating
functions and streamlining processes, automating data collection and fulfillment
functions, migrating revenue to the web, and outsourcing select activities.
During the second quarter of 2002, the Company incurred a pre-tax restructuring
charge of $30.9 million in connection with these actions. The charge includes
$18.6 million for severance, $10.6 million for the write-off of assets which
were sold or abandoned (including $9.7 million resulting from the outsourcing
action discussed in detail below), and $1.7 million for lease termination
obligations.
As part of this third phase of the financial flexibility program, the
Company will outsource certain functions to Computer Sciences Corporation
("CSC"). Under the terms of the agreement, data center operations, technology
help desk and network management functions in the United States and in the
United Kingdom will transition to CSC. In addition, as part of the agreement,
CSC acquired the Company's data center and print mail facility located in
Berkeley Heights, New Jersey and related assets for $10 million which management
considered the fair value for the assets. This resulted in the $9.7 million
impairment loss noted above. As part of this transaction, in August 2002, 350
D&B employees transitioned to CSC.
The first phase of financial flexibility began in the fourth quarter of 2000
and the second phase began in the second quarter of 2001. The first phase of the
financial flexibility program reduced expenses to generate approximately $130
million in annualized funds that can be reallocated for investment. In
connection with this program, D&B recorded in 2000 a pre-tax restructuring
charge of $41.5 million to globalize administrative functions, streamline data
collection and fulfillment, rationalize sales and marketing functions and
consolidate and simplify technology functions. During the second quarter of
2001, the Company reversed $4.0 million of this 2000 restructuring charge. The
Company determined that severance for approximately 50 employees would not be
utilized and lowered its estimate of its remaining lease termination
liabilities. The second phase of the financial flexibility program reduced
expenses to generate approximately $70 million in funds that can be reallocated
for investment. Actions taken included reengineering administrative functions
and instituting common business practices worldwide. The Company recorded a
pre-tax restructuring charge of $32.8 million in connection with these actions.
As of June 30, 2002, D&B has terminated approximately 1,700 of the
employees affected under all three phases of the financial flexibility program.
Approximately 1,200 additional employees worldwide will be terminated in
connection with the third phase, including the 350 employees that transitioned
to CSC as mentioned above. This brings the total number of employees reduced
from the core business as a result of the three phases of this program since its
inception in October 2000, to approximately 2,900, and positions eliminated to
3,200, which includes 300 open positions. The Company completed all the actions
contemplated under the first phase of its financial flexibility program as of
the end of 2001, and completed the remainder of the actions under the second
phase as of June 30, 2002.
Results of Operations
Consolidated Results
For the quarter ended June 30, 2002, D&B reported net income of $10.2
million, or $.14 per share basic and $.13 per share diluted. This compares with
second quarter 2001 reported net income of $36.7 million and earnings per share
of $.46 basic and $.44 diluted. Second quarter 2002 results included net pre-tax
restructuring charge of $30.9 million. Second quarter 2001 results included a
net pre-tax restructuring charge of $28.8 million, $7.0 million for the reversal
of excess accrued reorganization costs in connection with the 2000 Distribution
(as defined in Note 7 to the consolidated financial statements), and a gain of
$36.4 million on the sale of the Receivable Management Services business.
Excluding these transactions which are discussed in detail in the Overview
section above (and included in the tables on page 16), net income for the second
quarter 2002 was $31.8 million, which compares with second quarter 2001 of $27.4
million. Earnings per share, excluding these items, were $.43 per share basic
and $.41 diluted, up 27% and 24%, respectively from second quarter 2001 of $.34
basic and $.33 diluted, reflecting operating income growth, as well as the
continued benefit of a lower underlying tax rate and share repurchase activity
in the second half of 2001 and first quarter of 2002.
For the first half of 2002, reported net income of $45.8 million, or $.61
per basic share and $.59 per share diluted, was down 32% from the prior year's
first half reported net income of $67.6 million, or $.84 per basic share and
$.82 per share diluted, driven by the items discussed above. Excluding those
items, which are discussed in detail in the Overview section (and included in
the tables on page 16), first half 2002 net income was $67.4 million, or 16%
higher than the prior year's first half income of $58.3 million. Earnings per
share would have increased 23% basic and diluted over first half 2001, excluding
those items, resulting from operating income growth, as well as the continued
benefit of a lower tax rate and share repurchase activity in the second half of
2001 and first quarter of 2002, as mentioned above.
For 2002, reported and core revenues are the same. For 2001, they differ by
the results of Receivable Management Services and other divested businesses. In
the second quarter of 2002, reported operating revenues of $305.2 million
declined 5%, compared with $320.7 million in the second quarter of 2001, which
includes $25.2 million of revenues from Receivable Management Services and other
divested businesses. Core revenues, which exclude the revenues from Receivable
Management Services and the other divested businesses, were up 3% both before
and after the effect of foreign exchange. This was driven by core revenue growth
in North America of 4%, in APLA of 11% (16% growth before the effect of foreign
exchange), and in Europe of 1% (both before and after the effect of foreign
exchange).
D&B's second quarter results in 2002, before the effect of foreign exchange,
reflect an 11% increase in revenues from value-added Risk Management Solutions
and flat performance in traditional products in Risk Management Solutions, a 6%
increase in Sales & Marketing Solutions, where North American marketing revenue
growth of 8% more than offset flat revenue performance internationally, and a
38% increase in Supply Management Solutions, primarily driven by growth in
Europe.
Reported operating revenues for the first half of 2002 were $623.7 million,
down 8% compared to $678.3 million in the first half of 2001, driven by the
inclusion in 2001 of $70.5 million from Receivable Management Services and other
divested businesses. Core revenues, which exclude the divested businesses,
increased 3% over the prior year's core revenues of $607.8 million. An increase
in first half core revenue of 12% in APLA and 4% in North America was partially
offset by a decline in Europe of 2%. Excluding the impact of foreign exchange,
core revenues increased 3% in the first half of 2002 compared to 2001, with
APLA's revenue growing 16% from prior year, partially offset by a decline in
Europe of 1%. These first half 2002 results, excluding the effect of foreign
exchange, reflect a 5% increase over the same period a year ago, in value-added
Risk Management Solutions, partially offset by a 1% decline in the performance
of traditional Risk Management Solutions products, 10% growth over the first
half of the prior year in Sales & Marketing Solutions, where growth of 13% in
North America and 11% growth in APLA more than offset a decline of 6% in Europe,
and a 24% increase over first half 2001 in Supply Management Solutions due to
growth in Europe.
Total operating expenses decreased 5% to $275.1 million in the second
quarter of 2002 compared with $289.7 million in the second quarter of 2001.
Operating expenses, excluding the restructuring and reorganization charges noted
in the table in the Overview section above, decreased 12% from $115.8 million in
the second quarter of 2001, to $102.2 million in the same period in 2002,
primarily as a result of net cost savings achieved through the financial
flexibility program discussed above, and also benefiting from the sale of the
Receivable Management Services business. Selling and administrative expenses
declined 5% to $122.1 million in the second quarter of 2002 compared with $128.3
million in the second quarter of 2001. Administrative cost savings achieved
through the financial flexibility program were partially offset by transition
costs of $10.6 million incurred in implementing the Blueprint for Growth
Strategy and planned spending in the business to leverage the brand, enhance the
current business, further develop B2B e-business solutions and build a winning
culture. Depreciation and amortization decreased 16% to $19.9 million in the
second quarter of 2002 as compared to the second quarter of 2001 as a result of
lower capitalized spending during the past few years, the impact of no longer
amortizing goodwill (see Note 2 to the Consolidated Financial Statements), and
the write-off and sale of certain assets in connection with the financial
flexibility programs, which were recorded as part of restructuring charges.
Year-to-date total operating expenses were down 10% to $530.8 million in
2002 compared to $589.0 million in 2001. First half operating expenses,
excluding the restructuring and reorganization costs noted above, declined 15%
from the same period last year, resulting primarily from costs savings achieved
through the financial flexibility program and the sale of the Receivable
Management Services business, partially offset by transition costs of $19.5
million year-to-date, as discussed above. Selling and administrative decreased
8% to $249.5 million in the first half of 2002 compared to the same period in
2001 as discussed above. Depreciation and amortization decreased to $39.4
million in the first half of 2002, a 19% decline compared to 2001 due to the
same factors as noted above.
Operating income decreased 3% in the second quarter of 2002 to $30.1 million
from $31.0 million in the second quarter of 2001. Excluding the restructuring
and the reversal of excess accrued reorganization costs, operating income
increased 15% to $61.0 million compared to $52.8 million in 2001 detailed in the
Overview section above.
Operating income for the first half of 2002 increased 4% to $92.9 million
from $89.3 million in 2001. Excluding the same costs mentioned above, operating
income for the first half of 2002 was $123.8 million, an 11% increase over the
same period in the prior year, primarily as a result of the financial
flexibility program initiatives which continue to reduce costs throughout the
Company.
Non-operating expense -- net was $7.8 million in the second quarter of 2002
compared with non-operating income of $30.7 million in the second quarter of
2001, which included a gain on the sale of Receivable Management Services of
$36.4 million. Non-operating income (expense) -- net includes interest income
and expense, and other income (expense) -- net. Interest income was $.6 million
and $1.5 million in the second quarter of 2002 and 2001, respectively. Interest
expense of $4.9 million in the second quarter of 2002 decreased by 13% compared
to interest expense of $5.6 million in the second quarter of the prior year due
to lower interest rates. Other income (expense) -- net was $3.5 million expense
in the second quarter of 2002, primarily relating to the $2.9 million investment
write-off of Avantrust, LLC, (see Note 8 to the Consolidated Financial
Statements) and was income of $34.8 million in the second quarter of 2001,
including the $36.4 million gain on the sale of the Receivable Management
Services business.
Year-to-date non-operating expense -- net was $12.4 million compared with
non-operating income of $24.6 million in the same period of 2001, which included
the gain on the sale of Receivable Management Services mentioned above, of $36.4
million. Interest income was $1.3 million compared with $2.3 million during the
first half of 2001. Interest expense of $9.9 million in the first six months of
2002, compares to financing costs of $12.2 million in the same period of 2001
(including $6.8 million of interest expense and $5.4 million of minority
interest expense) due to lower interest rates, resulting from the exchange of
minority interest financing with long-term debt in the first quarter of 2001.
Other income (expense) -- net was $3.8 million expense in the first half of
2002, which includes the Avantrust, LLC write-off described above, and was
income of $34.5 million in 2001, including the gain on the sale of the
Receivable Management Services business as stated above.
D&B's effective tax rate was 49.2% in the second quarter of 2002 compared
with 38.8% in the second quarter of 2001. The difference is largely attributable
to the 24% tax rate applied to the gain on the sale of the Receivable Management
Services business in 2001. In both the second quarters of 2002 and 2001, the
Company's effective tax rate is negatively impacted by the non-deductibility in
some countries of certain items included within the restructuring charge and
shown in the tables on page 16. The underlying rate, which excludes the tax
impact of the items noted above, was 38.0% in the second quarter of 2002 and
39.5% in the same period in 2001. The underlying tax rate has declined as a
result of better global tax planning as well as improvements in tax planning at
the state and local level.
On a year-to-date basis, the effective rate was 41.1% in 2002 compared to
39.1% in the first half of 2001, due to the factors noted above. The underlying
rate in the first six months of 2002 was 38.0% and was 39.5% in the first six
months of 2001. As noted above, the underlying tax rate has declined as a result
of better global tax planning as well as improvements in tax planning at the
state and local level.
D&B recognized $1.2 million and $1.1 million as equity in net losses of
affiliates for the quarters ended June 30, 2002 and 2001, respectively. For the
first half of 2002, the Company recognized $1.7 million as equity in net losses
of affiliates, compared to $1.8 million for the first half of 2001. These losses
result from the Company's investment in Avantrust, LLC, which the company exited
during the second quarter of 2002 (see Note 8 to the Consolidated Financial
Statements).
In light of revised expectations for future capital market returns, the
Company is considering lowering the assumed return on plan assets that is used
in the calculation of its net periodic pension income. As discussed in the
Company's Annual Report on Form 10-K for the year ended December 31, 2002, the
Company currently uses a rate of 9.75%. The Company has not made a decision
regarding the extent of any such adjustment. However, by way of example, each
downward adjustment of a 1/4 percentage point would result in a decrease in
pension income of approximately $3.5 million pre-tax per year.
Segment Results (see Note 10 to the Consolidated Financial Statements)
North America
North America's reported revenues of $215.5 million in the second quarter of
2002, declined 1% from the second quarter of 2001 of $217.9 million, which
included $10.0 million of revenues from the divested Receivable Management
Services business. North America's core revenues were $215.5 million in the
second quarter of 2002, up 4% from the second quarter of 2001. In comparing
second quarter 2002 and second quarter 2001 core revenues, North America's
revenues from Risk Management Solutions increased 2% to $150.5 million, revenues
from Sales & Marketing Solutions increased 8% to $59.8 million, and revenues
from Supply Management Solutions decreased 2% to $5.2 million. The increase in
revenues in Risk Management Solutions reflected a 10% increase in revenues for
value-added products and a 1% increase in traditional products. The 8% increase
in revenues from Sales & Marketing Solutions was driven by growth in value-added
marketing products and last year's acquisitions of iMarket and Harris Infosource
(the combined acquisitions contributed $2.5 million, or approximately half of
the growth).
North America's first half 2002 reported revenues of $459.8 million declined
4% from the first half of 2001 of $481.2 million, which included revenues of
$38.5 million from the divested Receivable Management Services business. For the
first half of 2002, North America's core revenue was $459.8 million, up 4% from
the same period in the prior year. Compared to prior year, North America's
revenues from Risk Management Solutions of $310.0 million were flat, revenues
from Sales & Marketing Solutions increased 13% to $138.8 million, and revenues
from Supply Management Solutions of $11.0 million were down 1%. The flat revenue
performance in Risk Management Solutions is the result of a 6% increase in
value-added products, offset by a 1% decline in traditional products. The 13%
increase in revenues from Sales & Marketing Solutions benefited from last year's
acquisitions of iMarket and Harris Infosource, which together contributed
approximately half of the growth.
North America's operating income in the second quarter of 2002 was $66.3
million, up 5% from $63.3 million in the second quarter of 2001. For the first
half, operating income was $151.1 million, up 2% from $148.1 million for the
same period in the prior year. North America's operating income growth reflects
the Company's financial flexibility initiatives and favorable revenue results,
offset by investments in the business and the loss of operating income from the
Receivable Management Services business sold in the second quarter of 2001.
Europe
Europe's reported revenues of $81.2 million in the second quarter of 2002
declined 7% from the second quarter of 2001 of $87.7 million, which included
revenues of $7.7 million from the divested Receivable Management Services
business. Europe's core revenues were $81.2 million in the second quarter of
2002, up 1% from the second quarter 2001 both before and after the effect of
foreign exchange, reflecting a weak economy and the transformation to a "One
Europe" business model. Before the effect of foreign exchange, Europe would have
reported in the second quarter of 2002 a decrease in revenues from Risk
Management Solutions of 3%, reflecting declines in both traditional and
value-added products, flat revenues from Sales & Marketing Solutions, primarily
affected by the economy, and a significant increase in revenues from Supply
Management Solutions on a relatively small base, which was aided by investments
made in the second half of 2001 to drive growth in this product line.
Europe's first half 2002 reported revenues of $147.7 million declined 12%
from the first half of 2001 of $168.0 million, which included revenues of $17.4
million from the divested Receivable Management Services business. Europe's
first-half core revenue was $147.7 million, down 1% from the prior year before
the impact of foreign exchange and down 2% from the prior year after the effect
of foreign exchange, reflecting the weak economy and the "One Europe" business
transformation mentioned above. Before the effect of foreign exchange, Europe
would have reported in the first half of 2002 a decrease in revenues from Risk
Management Solutions of 2%, a decrease in Sales & Marketing Solutions of 6%, and
a substantial increase from Supply Management Solutions on a relatively small
base as mentioned above.
Europe reported an operating income of $10.8 million in the second quarter
of 2002, more than double the $5.2 million reported in the second quarter of
2001. For the first half of 2002, operating income was $6.7 million, compared
with a loss of $2.2 million in 2001. The Company's financial flexibility
initiatives, including a reorganization in the management of Europe from 19
separate country operations to a "One Europe" business model, continued to
contribute to the improvement in European operating income results.
APLA
APLA's reported revenues of $8.5 million in the second quarter of 2002
declined 44% from the second quarter of 2001 of $15.1 million, which included
revenues of $7.5 million from Receivable Management Services and other divested
businesses. The reported revenues in the second quarter of 2001 include the
revenues of the Receivable Management Services business and Australia/New
Zealand operation, as well as revenues related to other business model changes
in the region. APLA's core revenues were $8.5 million in the second quarter of
2002, an 11% increase over the second quarter of 2001. Before the effect of
foreign exchange, core revenues would have increased 16%, reflecting solid
performance across most markets and favorable timing of certain customer work
this year versus last year, as well as a one-time project. Before the effect of
foreign exchange, APLA's revenues from Risk Management Solutions increased 25%,
driven by strong growth in value-added products, and revenues from Sales &
Marketing Solutions decreased 7% as a result of a decline in traditional
products, partially offset by the strong performance of value-added products.
APLA's first half 2002 reported revenues of $16.2 million declined 44% from the
first half of 2001 of $29.1 million, which included revenues of $14.6 million
from Receivable Management Services and other divested businesses. First-half
core revenue for APLA was $16.2 million, a 12% increase over the first half of
2001 and a 16% increase before the impact of foreign exchange. Excluding the
impact of foreign exchange for the first half of 2002, APLA's revenues from Risk
Management Solutions increased 18% and revenues from Sales & Marketing Solutions
increased 11% driven by strong performance of value-added products.
APLA reported an operating income of $2.3 million in the second quarter of
2002, more than double the $1.0 million reported in the second quarter of 2001.
For the first half of 2002, operating income for APLA was $1.6 million, compared
to a loss of $2.3 million in the first half of 2001. The improvement in APLA's
results reflects the benefit of the business model changes and the Company's
on-going financial flexibility initiatives.
Recent Accounting Pronouncements
As of January 1, 2002, the Company adopted the Statement of Financial
Accounting Standards No. 142 (SFAS No. 142), "Goodwill and Other Intangible
Assets." SFAS No. 142 addresses the financial accounting and reporting for
intangible assets acquired individually or with a group of other assets (but not
those acquired in a business combination) at acquisition. SFAS No. 142 also
addresses financial accounting and reporting for goodwill and other intangible
assets subsequent to their acquisition. Under the new rules, the Company is no
longer required to amortize goodwill and other intangible assets with indefinite
lives. Rather, the Company's goodwill is subject to periodic testing for
impairment at the reporting unit level. D&B considers its operating segments,
North America, Europe and APLA, as its reporting units under the definitions of
SFAS No. 142 for consideration of potential impairment of intangible and
goodwill balances. The Company performed the impairment test required by the new
standard on the recorded balance of goodwill as of December 31, 2001, in the
amount of $139.6 million and determined that no charge for impairment was
required.
The adoption of SFAS No. 142 resulted in a $1.3 million reduction in
amortization expense in the second quarter of 2002 compared to the same period
in 2001. For the first half of 2002, the reduction was $2.6 million compared to
the first half of 2001. The full year impact in 2002 is expected to be a
reduction of $5.3 million in amortization expense.
The pro forma impact of this accounting policy change is outlined in the
table below:
Dollar amounts in millions, except Three Months Ended Six Months Ended
per share data June 30, June 30,
-------------------------- -------------------------
2002 2001 2002 2001
----------- ----------- ---------- ----------
Reported Net Income $ 10.2 $36.7 $45.8 $ 67.6
Add Back: Goodwill Amortization - 1.3 - 2.6
----------- ----------- ---------- ----------
Adjusted Net Income $ 10.2 $38.0 $45.8 $70.2
=========== =========== ========== ==========
Basic EPS:
Reported Net Income $ 0.14 $ 0.46 $ 0.61 $ 0.84
Add Back: Goodwill
Amortization - 0.02 - 0.04
----------- ----------- ---------- ----------
Adjusted Net Income $ 0.14 $ 0.48 $ 0.61 $ 0.88
=========== =========== ========== ==========
Diluted EPS:
Reported Net Income $ 0.13 $ 0.44 $ 0.59 $0.82
Add Back: Goodwill
Amortization - 0.02 - 0.04
----------- ----------- ---------- ----------
Adjusted Net Income $ 0.13 $ 0.46 $ 0.59 $ 0.86
=========== =========== ========== ==========
SFAS No. 142 also provides that intangible assets that have finite useful lives
will continue to be amortized over their useful lives, but those lives will no
longer be limited to 40 years. SFAS No. 142 supersedes APB Opinion No. 17,
"Intangible Assets." Other intangible assets of $9.2 million at December 31,
2001 that continue to be amortized have been reclassified and are now included
in Other Non-Current Assets on the Balance Sheet.
On January 1, 2002, the Company adopted Statement of Financial Accounting
Standards No. 144 (SFAS No. 144), "Accounting for the Impairment or Disposal of
Long-Lived Assets." This statement addresses financial accounting and reporting
for the impairment of long-lived assets. As discussed in Note 3 - Impact of
Implementation of the "Blueprint for Growth" Strategy - during the second
quarter of 2002, the Company incurred impairment losses of $10.6 million related
to assets being sold or abandoned during the quarter as a result of actions
taken under its financial flexibility program.
Liquidity and Financial Position
Management believes that cash flows generated from its operations and
supplemented as needed with readily available financing arrangements are
sufficient to meet the short-term and long-term needs of D&B. D&B accesses the
commercial paper market from time to time to fund working capital needs and
share repurchases. Such borrowings have been supported by D&B's bank credit
facilities.
At June 30, 2002, cash and cash equivalents totaled $147.1 million, a slight
increase from $145.3 million at December 31, 2001. This was driven primarily by
the $105.1 million of cash provided from operations and the $21.5 million of
proceeds of the sales of the Murray Hill, New Jersey building and the Berkeley
Heights, New Jersey building and its related assets. These sources of cash were
offset by the $111.3 million used for share repurchases in the first half of
2002, and $21.1 million of investments in capital expenditures and capitalized
software.
Cash provided by operating activities
Net cash provided by operating activities in the first half of 2002 was
$105.1 million, while operating activities in the first half of 2001 provided
net cash of $154.7 million. Compared to the first half of last year, cash flows
from operating activities were $49.6 million lower. This was primarily due to
the $35.4 million of proceeds received in 2001 related to contracts to provide
the buyers of Receivable Management Services with credit information products
over 5 years, which was recorded in deferred revenue. The remaining difference
is mostly due to a change in the core business product mix away from Risk
Management Solutions which largely consist of annual subscriptions. This shift
has resulted in less of an increase this year versus last year in unearned
subscription income. During the first six months of 2002, D&B made payments of
$16.1 million related to restructuring actions under the Blueprint for Growth
compared to $19.6 million for the first six month of 2001.
Cash used in investing activities
Net cash used in investing activities totaled $2.0 million in the first six
months of 2002, compared with net cash provided by investing activities of $27.5
million in the first half of 2001. During the first half of 2002, cash of $21.5
million was provided by the sale in the second quarter of the two New Jersey
buildings and the related assets as mentioned above, compared with the first
half of 2001, when cash provided from the sale of the Receivable Management
Services business of $76.4 million was only partially offset by the acquisition
of iMarket in the second quarter for $16.6 million. Investment in capital
expenditures and capitalized software was $21.1 million in the first half of
2002 versus $27.2 million in the same period of 2001, as the Company has
reallocated a portion of its spending to investments treated as period costs.
Investments in Unconsolidated Affiliates were $.9 million in 2002, compared with
$8.9 million in 2001 when the Company made investments in Avantrust, LLC, its
joint venture with AIG that it exited during the second quarter of 2002.
Cash used in financing activities
Net cash used in financing activities was $103.0 million in the first half
of 2002, compared with net cash used in financing activities of $67.4 million
during 2001.
In January 2002, the Company acquired 2.5 million shares in a
privately-negotiated block trade for $85.1 million, funded with cash on hand and
short-term commercial paper borrowings. At June 30, 2002, the Company had no
commercial paper borrowings outstanding.
D&B repurchased 670,700 shares of common stock for $26.2 million in the
first half of 2002 to mitigate the dilutive effect of shares issued under stock
incentive plans and in connection with its Employee Stock Purchase Plan. Net
proceeds from D&B stock plans totaled $7.8 million in the first six months of
2002.
During the first half of 2001, D&B repurchased 947,500 shares of common
stock for $25.3 million to mitigate the dilutive effect of shares issued under
stock incentive plans and in connection with the D&B Employee Stock Purchase
Plan. D&B received proceeds in connection with its stock plans of $10.9 million
in the first half of 2001. In addition, the Company repurchased 47,000 shares
for $1.2 million during the second quarter of 2001 in connection with a special
repurchase program authorized by its Board of Directors in May of 2001.
There was no change in long-term borrowings in the first half of 2002. In
the first quarter of 2001, the Company issued $300 million in principal of
notes. The cash proceeds from the issuance of these notes were used to repay a
$300 million obligation resulting from the purchase of an unrelated partner's
interest in a limited partnership. In addition, during the first quarter of
2001, the Company repaid $49.5 million of short-term commercial paper
borrowings, and at June 30, 2001 had no commercial paper borrowings outstanding.
In September 2001, D&B renewed its $175 million 364-day revolving credit
facility, which expires in September 2002. The Company also has an additional
$175 million term revolving credit facility expiring in September 2005. Under
these facilities, D&B has the ability to borrow at prevailing short-term
interest rates. D&B has not drawn on these facilities since their inception and
has no borrowings outstanding under these facilities at June 30, 2002. The
Company intends to renew its 364-day facility on or before its expiration in
September 2002 for $100 million, because it believes that cash flows generated
from its operations, supplemented as needed with its readily available financing
arrangements, are sufficient to meet its short-term and long-term needs.
Subsequent Developments
Data House Acquisition
In August 2002, the Company acquired Data House, an Italian provider of
real estate information that is used in Italy by banks, notaries, real estate
agencies and corporations for $22 million from Seat Pagine Gialle S.p.A.. The
acquisition will enhance the Company's current business by positioning the
Company for growth in serving the Italian banking sector. The acquisition will
be funded by cash on hand.
Sarbanes-Oxley Act of 2002
On July 30, 2002, the Sarbanes-Oxley Act of 2002 (the "Act") was enacted
into law. The Act contains, among other things, a requirement for audit
committees to pre-approve non-audit services provided by a company's independent
accountants, and to disclose to shareholders such approvals in periodic SEC
reports. The Act requires the Securities and Exchange Commission to issue
regulations to carry out these and other related provisions of the Act. The
Audit Committee of the Company's Board of Directors had previously adopted a
policy limiting the use of the Company's independent accountants,
PricewaterhouseCoopers LLP ("PwC"), for non-audit services. Under this policy,
management is authorized to use PwC for the "permitted services" described
below, provided the aggregate fees for such permitted services in any calendar
year does not exceed three times the annual audit fees. Under the policy, any
non-audit projects above the foregoing fee cap would require the prior approval
of the Audit Committee. The policy defines "permitted services" as: (a) tax
services; (b) accounting and internal controls consultation; (c) audits to
support SEC filings; (d) pension plan and related audits; and (e) other projects
where PwC's knowledge of the Company will facilitate the cost-effective delivery
of the required services. The policy is subject to an overriding mandate that
all usage of PwC is subject to compliance with rules and regulations regarding
auditor independence.
The Company is assessing the impact of the various aspects of the Act on its
operations and periodic reporting responsibilities and intends to fully comply
with all requirements in a timely manner.
Forward-Looking Statements
Certain statements in this Form 10-Q are forward-looking statements.
Statements that are not historical facts are forward-looking statements. In
addition, words such as "expects," "anticipates," "believes," "plans,"
"guidance" and similar expressions are intended to identify forward-looking
statements. All such forward-looking statements are based on D&B's reasonable
expectations at the time that they are made. However, forward-looking statements
are not guarantees of future performance as they involve risks, uncertainties
and assumptions that may prove to be incorrect and that may cause D&B's actual
results and experience to differ materially from the anticipated results or
other expectations expressed in such forward-looking statements. The risks,
uncertainties and assumptions that may affect D&B's performance, which are
discussed more fully in the Company's 2001 Form 10-K, include: the possibility
that economic or other conditions might lead to a reduction in the demand for
D&B products and services worldwide; the possibility that the current economic
slowdown may worsen and/or persist for an unpredictable period of time; D&B's
ability to successfully implement its Blueprint for Growth, including the
ability to achieve its financial flexibility objectives on terms and conditions
contemplated by D&B; changes in the business information and risk management
industries and markets, including changes in customer preferences for products
and product delivery formats resulting from advances in information technology;
competitive pressures causing price reductions and/or loss of market share;
risks associated with investments and operations in foreign countries, including
foreign economic conditions, exchange rate fluctuations, regulatory environment,
and cultural factors; D&B's ability to successfully integrate recent and future
acquisitions, alliances and investments; D&B's ability to protect its
proprietary information and technology or to obtain necessary licenses on
commercially reasonable terms; the potential loss of key business assets,
including data center capacity, or interruption of telecommunication links or
power sources; changes in the legislative, accounting, regulatory and commercial
environments affecting D&B's ability to collect, manage, aggregate and use data;
D&B's ability to attract and retain key employees; and the competitive
implications that the conversion to the euro may have on D&B's pricing and
marketing strategies. D&B undertakes no obligations to update any
forward-looking statements to reflect future events or circumstances.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
The Company's market risks primarily consist of the impact of changes
in currency exchange rates on assets and liabilities of non-U.S. operations and
the impact of changes in interest rates. The Dun & Bradstreet Corporation's 2001
Consolidated Financial Statements included in its Annual Report on Form 10-K
provide a more detailed discussion of the market risks affecting operations. As
of June 30, 2002, no material change had occurred in the Company's market risks,
as compared to the disclosure in the Form 10-K for the year ending December 31,
2001.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Information in response to this Item is included in Note 7 - Contingencies on
Pages 10-14 in Part I, Item 1 of this Form 10-Q.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
(10.1) Technology Services Agreement between Dun & Bradstreet, Inc. and Computer
Sciences Corporation, dated June 27, 2002.
(10.2) Employment Agreement dated July 8, 2002, by and between Steven W. Alesio
and The Dun & Bradstreet Corporation.
(b) Reports on Form 8-K: No current reports filed during this quarter.
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.
THE DUN & BRADSTREET CORPORATION
Date: August 13, 2002 By: /s/ SARA MATHEW
--------------------------------------------------
Sara Mathew
Senior Vice President and Chief Financial Officer
Date: August 13, 2002 By: /s/ MARY JANE RAYMOND
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Mary Jane Raymond
Vice President and Corporate Controller