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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 September 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 September 30, 2002
Common Stock, --------------------
par value $.01 per share 74,324,393
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 Nine Months Ended September 30, 2002 and 2001 3
Consolidated Balance Sheets (Unaudited)
September 30, 2002 and December 31, 2001 4
Consolidated Statements of Cash Flows (Unaudited)
Nine Months Ended September 30, 2002 and 2001 5
Notes to Consolidated Financial Statements (Unaudited) 6-17
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 18-32
Item 3. Quantitative and Qualitative Disclosures About Market Risk 32
Item. 4. Controls and Procedures 32
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 33
Item 6. Exhibits and Reports on Form 8-K 33
SIGNATURES 34-36
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The Dun & Bradstreet Corporation and Subsidiaries
Consolidated Statements of Operations (Unaudited)
Quarter Ended Year-to-Date
September 30, September 30,
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Amounts in millions, except per share data 2002 2001 2002 2001
- --------------------------------------------------------- -------------- -------------- ------------- --------------
Revenue $ 297.2 $ 290.5 $ 920.9 $ 968.8
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Operating Costs:
Operating Expenses 100.3 97.4 311.3 344.7
Selling and Administrative Expenses 118.9 116.2 368.4 387.5
Depreciation and Amortization 20.9 23.3 60.3 71.9
Restructuring Expense - Net - - 30.9 28.8
Reorganization Costs - - - (7.0)
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Operating Costs 240.1 236.9 770.9 825.9
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Operating Income 57.1 53.6 150.0 142.9
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Non-Operating Income (Expense) - Net:
Interest Income 0.7 2.0 2.0 4.3
Interest Expense (4.9) (5.1) (14.8) (11.9)
Minority Interest Expense - - - (5.4)
Other Income (Expense) - Net 1.8 (0.5) (2.0) 34.0
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Non-Operating Income (Expense) - Net (2.4) (3.6) (14.8) 21.0
- --------------------------------------------------------- -------------- -------------- ------------- --------------
Income before Provision for Income Taxes 54.7 50.0 135.2 163.9
Provision for Income Taxes 21.5 19.4 54.5 63.9
Equity in Net Losses of Affiliates - (1.5) (1.7) (3.3)
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Net Income $ 33.2 $ 29.1 $ 79.0 $ 96.7
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Basic Earnings per Share of Common Stock $ 0.45 $ 0.37 $ 1.06 $ 1.21
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Diluted Earnings per Share of Common Stock $ 0.43 $ 0.36 $ 1.03 $ 1.18
- --------------------------------------------------------- -------------- -------------- ------------- --------------
Weighted Average Number of Shares Outstanding:
Basic 74.3 79.4 74.6 80.0
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Diluted 76.5 81.8 77.0 82.1
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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)
September 30, December 31,
Dollar amounts in millions, except per share data 2002 2001
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Assets
Current Assets
Cash and Cash Equivalents $ 136.0 $ 145.3
Accounts Receivable---Net of Allowance of $21.7 at September 30, 2002 and 279.2 317.8
$21.0 at December 31, 2001
Other Current Assets 95.4 117.1
Total Current Assets 510.6 580.2
Non-Current Assets
Property, Plant and Equipment, Net 143.4 158.0
Prepaid Pension Costs 380.3 333.7
Computer Software, Net 77.0 103.6
Goodwill, Net 173.2 139.6
Other Non-Current Assets 96.1 116.1
Total Non-Current Assets 870.0 851.0
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Total Assets $ 1,380.6 $ 1,431.2
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Current Liabilities
Notes Payable $ 0.1 $ -
Other Accrued and Current Liabilities 324.3 332.7
Unearned Subscription Income 330.7 330.0
Total Current Liabilities 655.1 662.7
Pension and Postretirement Benefits 382.8 377.3
Long-Term Debt 299.9 299.6
Other Non-Current Liabilities 77.3 111.2
Contingencies (Note 7)
Minority Interest - 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 0.8 0.8
400,000,000 shares for 2002 and 2001 respectively---issued---81,945,520
Unearned Compensation Restricted Stock (0.9) (1.8)
Capital Surplus 219.6 227.3
Retained Earnings 241.1 162.3
Treasury Stock, at cost, 7,621,127 shares at September 30, 2002 (241.1) (148.7)
and 5,067,235 shares at December 31, 2001 respectively
Cumulative Translation Adjustment (198.4) (205.2)
Minimum Pension Liability (55.6) (55.6)
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Total Shareholders' Equity (34.5) (20.9)
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Total Liabilities and Shareholders' Equity $ 1,380.6 $ 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)
Nine Months Ended September 30,
Dollar amounts in millions 2002 2001
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Cash Flows from Operating Activities:
Net Income $ 79.0 $ 96.7
Reconciliation of Net Income to Net Cash
Provided by Operating Activities:
Depreciation and Amortization 60.3 71.9
Gain from Sales of Businesses (2.6) (43.0)
Equity Losses in Excess of Dividends Received from Affiliates 1.7 3.3
Restructuring Expense - Net and Other Asset Impairments 30.9 34.9
Decrease in Accounts Receivable 51.7 58.9
Net Decrease in Other Current Assets 3.1 13.0
Deferred Revenue from RMS Agreement (5.3) 32.3
Deferred Income Taxes (13.1) (1.8)
Accrued Income Taxes - Net 48.1 19.3
Net Increase in Long-Term Liabilities 4.3 1.3
Increase in Other Long-Term Assets (37.5) (34.9)
Net (Decrease) Increase in Unearned Subscription Income (9.1) 3.0
Net Decrease in Other Accrued and Current Liabilities (84.9) (73.5)
Other 7.1 6.8
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Net Cash Provided by Operating Activities: 133.7 188.2
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Cash Flows from Investing Activities:
Proceeds from Sales of Real Estate 21.5 -
Proceeds from Sales of Businesses 1.3 88.1
Payments for Acquisitions of Businesses, Net of Cash Acquired (21.2) (16.6)
Capital Expenditures (8.2) (11.8)
Additions to Computer Software and Other Intangibles (25.7) (26.6)
Investments in Unconsolidated Affiliates (0.9) (8.9)
Other (8.4) 5.7
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Net Cash (Used in) Provided by Investing Activities (41.6) 29.9
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Cash Flows from Financing Activities:
Payments for Purchase of Treasury Shares (114.2) (84.2)
Net Proceeds from Stock Plans 10.0 16.2
Decrease in Commercial Paper Borrowings - (49.5)
Repayment of Minority Interest Obligations - (300.0)
Increase in Long-Term Borrowings - 299.6
Other 0.8 (0.9)
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Net Cash (Used in) Financing Activities (103.4) (118.8)
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Effect of Exchange Rate Changes on Cash and Cash Equivalents 2.0 1.4
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(Decrease) Increase in Cash and Cash Equivalents (9.3) 100.7
Cash and Cash Equivalents, Beginning 145.3 70.1
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Cash and Cash Equivalents, End $ 136.0 $ 170.8
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Supplemental Disclosure of Cash Flow information:
Cash Paid Year to Date for:
Income Taxes, Net of Refunds $ 22.2 $ 38.7
Interest and Minority Interest Expense $ 18.3 $ 16.3
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") Annual Report on Form 10-K for
the year ended December 31, 2001. 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 the 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 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 third quarter of 2002 compared with the same period
in 2001, of which approximately $0.4 million is attributable to North America
and $0.9 million attributable to Europe. For the first nine months of 2002, the
reduction was $3.9 million compared with the first nine months 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 Nine Months Ended
Dollar amounts in millions, except September 30, September 30,
per share data
-------------------------- -------------------------
2002 2001 2002 2001
----------- ----------- ---------- ----------
Reported Net Income $ 33.2 $29.1 $79.0 $ 96.7
Add Back: Goodwill Amortization - 1.3 - 3.9
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Adjusted Net Income $ 33.2 $30.4 $79.0 $100.6
=========== =========== ========== ==========
Basic EPS:
Reported Basic EPS $ 0.45 $ 0.37 $ 1.06 $ 1.21
Add Back: Goodwill
Amortization - 0.02 - 0.05
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Adjusted Basic EPS $ 0.45 $ 0.39 $ 1.06 $ 1.26
=========== =========== ========== ==========
Diluted EPS:
Reported Diluted EPS $0.43 $ 0.36 $ 1.03 $1.18
Add Back: Goodwill
Amortization - 0.02 - 0.05
----------- ----------- ---------- ----------
Adjusted Diluted EPS $ 0.43 $ 0.38 $ 1.03 $ 1.23
=========== =========== ========== ==========
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 on the Balance Sheet
and are now included in Other Non-Current Assets.
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.
In June 2002, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 146, "Accounting for Costs Associated with
Exit or Disposal Activities ("SFAS No. 146")." SFAS No.146 addresses financial
accounting and reporting for costs associated with restructuring activities,
including severance and lease termination obligations. It nullifies Emerging
Issues Task Force ("EITF") Issue No. 94-3, "Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an Action (including
Certain Costs Incurred in a Restructuring)" ("EITF Issue 94-3"). The principal
difference between SFAS No.146 and EITF Issue 94-3 is in the timing of liability
recognition. SFAS No.146 requires that a liability for a cost associated with an
exit or disposal activity, including severance and lease termination
obligations, be recognized when the liability is incurred, rather than at the
date of a company's commitment to an exit plan. SFAS No.146 is effective for
exit or disposal activities after December 31, 2002. Adoption of SFAS No.146 by
D&B may result in expense recognition over a period of time rather than at one
time if D&B undertakes restructuring activities after December 31, 2002.
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 Company's
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 strengthening our leadership and continuing to
promote and add leaders.
To fund these and other investments, D&B has identified, and will continue
to identify opportunities to reallocate and in some cases reduce spending in
certain areas with the objective of investing for growth and delivering
shareholder value. D&B also reviewed its non-core businesses and assets with a
view to converting them into cash.
Restructuring/Financial Flexibility Program
In April 2002, the Company announced the third phase of its financial
flexibility program. To create a more efficient business model, the Company
intends to 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 included $18.6
million for severance, $10.6 million for the write-off of assets that 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 outsourced certain technology functions to Computer Sciences Corporation
("CSC"). Under the terms of the agreement, approximately 400 D&B 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. 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.
The first phase of the financial flexibility program 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 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 to reflect the Company's
subsequent determination that severance for approximately 50 employees would not
be utilized and that its estimate of its remaining lease termination liabilities
would be lower than originally estimated. 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 September 30, 2002, D&B has terminated approximately 2,200 of the
employees affected under all three phases of the financial flexibility program,
including the approximately 400 employees who were transitioned to CSC, as
mentioned above. By June 30, 2003, approximately 600 additional employees
worldwide will be terminated in connection with the third phase. The Company
lowered its estimate of the number of employees to be terminated under the third
phase by 100. This will bring 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 2,800, reflecting the elimination of
3,100 positions (including 300 open positions).
The restructuring reserves and utilization to date were as follows:
---------------------------------------
(amounts in millions) Original 2002 Balance at
Charge in Payments/ 9/30/2002
Q2 2002 Write-Offs
---------------------------------------
2002 Restructuring Charge for:
Severance and Termination $ 18.6 $ (3.6) $15.0
Asset Write-Offs 10.6 (10.6) -
Lease Termination Obligations 1.7 (0.1) 1.6
---------------------------------------
$ 30.9 $(14.3) $16.6
---------------------------------------
--------------------------------------------------
(amounts in millions) Original Balance at 2002 Balance at
Charge 12/31/2001 Payments 9/30/2002
--------------------------------------------------
2001 Restructuring Charge for:
Severance and Termination $20.7 $19.2 $(16.8) $2.4
Asset Write-Offs 8.9 - - -
Lease Termination Obligations 3.2 1.6 (.4) 1.2
--------------------------------------------------
$32.8 $20.8 $(17.2) $3.6
--------------------------------------------------
2000 Restructuring Charge for:
Severance and Termination $28.2 $4.4 $(3.2) $1.2
Asset Write-Offs 4.5 - - -
Lease Termination Obligations 8.8 4.0 (.8) 3.2
--------------------------------------------------
$41.5 $8.4 $(4.0) $4.4
--------------------------------------------------
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 reserves for the 2001 and 2000 restructuring charges relate to future
severance payments for actions already taken for ongoing lease termination
obligations to be paid in the future.
Note 4 - Notes Payable and Indebtedness
D&B's $175 million 364-day revolving credit facility expired in September
2002. The Company renewed this facility in September 2002 for $100 million. 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 September 30, 2002. The Company decided to renew its 364-day
facility at a lower level because it believed 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.
The Company's borrowings at September 30, 2002 and December 31, 2001,
including interest rate swaps designated as hedges, are summarized below:
(amounts in millions) 2002 2001
-------- -------
Fair Value Of Long-Term Fixed Rate Notes $304.9 $ 297.3
Fair Value Of Interest-Rate Swaps (5.0) 2.3
----- ---------
Long Term Debt $299.9 $ 299.6
====== =========
Note 5 - Reconciliation of Weighted Average Shares
Three Months Ended Nine Months Ended
September 30, September 30,
(share data in thousands) 2002 2001 2002 2001
---- ---- ---- ----
Weighted average number of shares-basic 74,295 79,430 74,559 79,980
Dilutive effect of shares issuable under stock options,
restricted stock and performance share plans 2,188 2,216 2,412 1,934
Adjustment of shares applicable to stock options exercised
during the period and performance share plans 57 134 62 147
-- --- -- ---
Weighted average number of shares-diluted 76,540 81,780 77,033 82,061
====== ====== ====== ======
During the third quarter of 2002, the Company repurchased 85,400 shares
for $3.0 million to mitigate the dilutive effect of the shares issued under the
Company's stock incentive plans and its Employee Stock Purchase Plan. During the
first nine months of 2002, D&B repurchased 756,100 shares for $29.1 million for
this purpose. Also, during the first quarter of 2002, the Company repurchased
2.5 million shares at the market price of $85.1 million, in a privately
negotiated block trade.
Options to purchase 1,600,974 and 166,084 shares of common stock at
September 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 grant date.
Note 6 - Comprehensive Income
The Company's total comprehensive income, which includes net income and other
gains and losses that affect shareholders' equity, was as follows, for the
three-month and nine-month periods ended September 30:
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------ ---------------------
(amounts in millions)
2002 2001 2002 2001
---- ---- ---- ----
Net Income $33.2 $29.1 $79.0 $96.7
Other Comprehensive Income (Loss)
Foreign Currency Translation Adjustment 4.2 0.6 6.8 (2.8)
Unrealized Losses On Investments - - (0.2) (0.1)
------ ------ ----- -----
Total Comprehensive Income $37.4 $29.7 $ 85.6 $93.8
====== ====== ====== =====
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 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 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 separated through a spin-off 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 separated through a spin-off into two separate
public companies, The Dun & Bradstreet Corporation and R.H. Donnelley
Corporation ("Donnelley") (the "1998 Distribution"). During 1998, Cognizant
separated through a spin-off 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") separated through a spin-off
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, 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 on behalf of
Donnelley is contesting the IRS's formal assessment and would also contest the
assessment of amounts, if any, in excess of the amounts paid. Donnelley filed a
petition for a refund in the U.S. District Court on September 21, 2000. The case
is expected to go to trial in 2004. The Company would share responsibility for
any additional assessment, as well as share in any refund obtained, with IMS,
NMR and Moody's, as disclosed above.
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 Donnelley 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. Donnelley 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 and prevail, then the Company would share
responsibility for the assessment with Moody's, as disclosed above. If Donnelley
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. In recent verbal communications with the IRS, the IRS has
expressed a willingness to withdraw its proposed disallowance of certain royalty
expense deductions of $7.5 million for 1994. However, the IRS has also indicated
an intention to assert penalties of $7.5 million for 1995 and 1996 based on its
interpretation of applicable law. Donnelley has advised the Company that it
would challenge this interpretation. The Company estimates that its share of the
required payment to the IRS, after taking into account these proposed
adjustments, would be up to $48 million, net of available tax credits ($42
million net of associated tax benefits).
Amortization Expense Deductions - 1997-2002. The IRS has requested documentation
with respect to a transaction entered into 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 assessment were to be challenged
by the Company in U.S. District Court, management estimates that the Company's
cash payment to the IRS with respect to deductions claimed to date and including
any potential assessment of penalties of $6 million, could be up to $44 million
($41 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 $1.7 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. Any payments that would be made for these exposures would be
significant to the Company in the period a cash payment took place.
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 as 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 that ACNielsen is able to pay
after giving effect to (i) any plan submitted by such investment bank that 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 agreed 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.
No trial date has been set, and discovery is ongoing. 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 in
connection with the utilization of capital losses referred to above, 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. Hearings before the
arbitration panel are scheduled for December 2002. 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 did not
develop, 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. 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, in the
second quarter of 2002. For the first nine months of 2002, the Company
recognized $1.7 million as equity in net losses of affiliates, compared with
$3.3 million for the first nine months of 2001 and $1.5 million for the third
quarter of 2001.
Note 9 - Sale of Property
During the second quarter of 2002, the Company completed the sale of
its Murray Hill, New Jersey, 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 $10.0
million.
Note 10 - Acquisitions
During the third quarter of 2002, the Company acquired Data House, an
Italian provider of commercial and personal Italian real estate information that
is used in Italy by banks, notaries, real estate agencies and corporations in
business loan decisions, for $22.0 million ($21.2 million, net of cash acquired)
from Seat Pagine Gialle S.p.A. The acquisition was funded by cash on hand. The
Company recognized goodwill of $22.3 million in connection with the acquisition.
No separately identifiable intangible assets were acquired.
Note 11 - Dispositions
During the third quarter of 2002, the Company sold a portion of its
equity interests in its Singapore operations for $3.0 million. Proceeds included
$1.3 million in cash received during the third quarter of 2002 and a $1.7
million note receivable due in the fourth quarter of 2002. The Company
recognized a pre-tax gain of $2.6 million in Other Income (Expense) - Net for
these transactions.
The Company expects to complete the sale of its Korean operations in
the fourth quarter of 2002. D&B expects to receive proceeds of $3.0 million,
consisting of $1.8 million in cash and a note receivable for $1.2 million
payable over the 12 months following the closing. The Company expects to record
a pre-tax gain of approximately $2 million in Other Income (Expense) - Net.
Note 12 - Subsequent Events - Share Repurchase Program Authorized
In October 2002, the Company announced that its Board of Directors
authorized a share repurchase program of up to $100 million. This two-year
program is in addition to the Company's existing share repurchase program that
is designed to offset the dilutive effect of shares issued under employee
benefit arrangements.
Note 13 - SEGMENTS
Quarter Ended Year-to-Date
September 30, September 30,
---------------------- --------------------
Amounts in millions 2002 2001 2002 2001
- --------------------------------------------------------------- --------- --------- --------- --------
Revenue:
North America $ 211.9 $ 200.7 $ 671.7 $ 681.9
Europe 77.7 74.5 225.4 242.5
Asia Pacific / Latin America 7.6 15.3 23.8 44.4
--------- --------- --------- --------
Total Revenue $ 297.2 $ 290.5 $ 920.9 $ 968.8
--------- --------- --------- --------
Operating Income (Loss):
--------- --------- --------- --------
North America $ 67.3 $ 61.9 $ 218.4 $ 210.0
Europe 5.2 4.7 11.9 2.5
Asia Pacific / Latin America 1.2 2.0 2.8 (0.3)
--------- --------- --------- --------
Total Divisions 73.7 68.6 233.1 212.2
Corporate and Other (16.6) (15.0) (83.1) (69.3)
--------- --------- --------- --------
Operating Income $ 57.1 $ 53.6 $ 150.0 $ 142.9
--------- --------- --------- --------
Supplemental Geographic and Product Line Information:
Quarter Ended Year-to-Date
September 30, September 30,
---------------------- --------------------
Geographic Revenue 2002 2001 2002 2001
-------- --------- -------- -------
United States $ 205.3 $ 194.4 $ 651.2 $ 661.1
International 91.9 96.1 269.7 307.7
--------- --------- --------- --------
Total Geographic Revenue $ 297.2 $ 290.5 $ 920.9 $ 968.8
--------- --------- --------- --------
Product Line Revenue
---------------------------------------------------------- --------- --------- --------- --------
North America:
Risk Management Solutions $ 145.9 $ 142.2 $ 455.9 $ 451.0
Sales & Marketing Solutions 60.5 52.4 199.3 175.1
Supply Management Solutions 5.5 5.7 16.5 16.9
--------- --------- --------- --------
Core Revenue 211.9 200.3 671.7 643.0
Receivables Management Services and Other Divested Businesses - 0.4 - 38.9
--------------------------------------------------------------------------------- --------- --------
Total North America 211.9 200.7 671.7 681.9
--------- --------- --------- --------
Europe:
Risk Management Solutions 62.3 57.2 179.4 178.4
Sales & Marketing Solutions 14.1 16.7 40.3 44.9
Supply Management Solutions 1.3 0.6 5.7 1.8
--------- --------- --------- --------
Core Revenue 77.7 74.5 225.4 225.1
Receivables Management Services and Other Divested Businesses - - - 17.4
--------- --------- --------- --------
Total Europe 77.7 74.5 225.4 242.5
--------- --------- --------- --------
APLA:
Risk Management Solutions 6.2 6.5 18.7 17.5
Sales & Marketing Solutions 1.4 1.4 5.1 4.9
Supply Management Solutions - - - -
-------- --------- --------- --------
Core Revenue 7.6 7.9 23.8 22.4
Receivables Management Services and Other Divested Businesses - 7.4 - 22.0
--------- --------- --------- --------
Total APLA 7.6 15.3 23.8 44.4
--------- --------- --------- --------
Consolidated Operating Revenue:
Risk Management Solutions 214.4 205.9 654.0 646.9
Sales & Marketing Solutions 76.0 70.5 244.7 224.9
Supply Management Solutions 6.8 6.3 22.2 18.7
--------- --------- --------- --------
Core Revenue 297.2 282.7 920.9 890.5
Receivables Management Services and Other Divested Businesses - 7.8 - 78.3
--------- --------- --------- --------
Total Revenue $ 297.2 $ 290.5 $ 920.9 $ 968.8
--------- --------- --------- --------
Assets: September 2002 December 2001
----------------------------
North America $ 335.7 $ 387.7
Europe 431.8 447.2
Asia Pacific / Latin America 26.1 26.5
--------- ---------
Total Divisions 793.6 861.4
Corporate and Other (primarily domestic pensions and taxes) 587.0 569.8
--------- ---------
Total Assets $ 1,380.6 $1,431.2
--------- ---------
Goodwill: September 2002 December 2001
---------------------------
North America $ 45.9 $ 45.9
Europe 127.3 93.7
--------- ---------
Total Goodwill $ 173.2 $ 139.6
--------- ---------
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 third
quarter of 2002, and for the nine months ending September 30, 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
Annual Report on 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's core product
lines are: Risk Management Solutions, Sales & Marketing Solutions, and Supply
Management Solutions. In its discussion of operations, the Company has defined
its core revenue as the revenue generated from its core product lines in its
ongoing operations. Revenue 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 revenue
and operating income. For management reporting purposes, restructuring charges
and gains or losses on other transactions incurred in connection with D&B's
Blueprint for Growth Strategy are not allocated to any of the business segments.
Additionally, transition costs, which are period costs incurred to implement the
Company's strategy including consulting fees, costs of temporary employees,
relocation costs and stay bonuses, are included within Corporate and Other
expenses and are not allocated to 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 Nine Months Ended
September 30, September 30,
--------------------------- ---------------------------
Amounts in millions, except per share data 2002 2001 2002 2001
- ------------- ----------- --------------------------------- ----------- ----------- ----------- -----------
Revenue
North America $211.9 $200.3 $671.7 $643.0
Europe 77.7 74.5 225.4 225.1
Asia Pacific/Latin America 7.6 7.9 23.8 22.4
- ------------- --------------------------------------------- ----------- ----------- ----------- -----------
Core Revenue 297.2 282.7 920.9 890.5
Receivable Management Services and
Other Divested Businesses - 7.8 - 78.3
- ------------- ----------- --------------------------------- ----------- ----------- ----------- -----------
Total Revenue $297.2 $ 290.5 $ 920.9 $968.8
- ----------------------------------------------------------- ----------- ----------- ----------- -----------
Operating Income (Loss):
North America $ 67.3 $ 61.9 $218.4 $ 210.0
Europe 5.2 4.7 11.9 2.5
Asia Pacific/Latin America 1.2 2.0 2.8 (.3)
----------- ----------- ----------- -----------
Total Divisions 73.7 68.6 233.1 212.2
Corporate and Other (1) (16.6) (15.0) (83.1) (69.3)
------------ --------------------------------------------- ----------- ----------- ----------- -----------
Operating Income $57.1 $ 53.6 $ 150.0 $ 142.9
- ----------------------------------------------------------- ----------- ----------- ----------- -----------
Non-Operating Income (Expense) - Net (2) (2.4) (3.6) (14.8) 21.0
Provision for Income Taxes 21.5 19.4 54.5 63.9
Equity in Net Losses of Affiliates, Net of Income Taxes - (1.5) (1.7) (3.3)
- ----------------------------------------------------------- ----------- ----------- ----------- -----------
Net Income $33.2 $ 29.1 $ 79.0 $ 96.7
---------------------------------------------------------- ----------- ----------- ----------- -----------
Basic Earnings per Share of Common Stock $ 0.45 $ 0.37 $ 1.06 $ 1.21
- ----------------------------------------------------------- ----------- ----------- ----------- -----------
Diluted Earnings per Share of Common Stock $ 0.43 $ 0.36 $ 1.03 $ 1.18
- ----------------------------------------------------------- ----------- ----------- ----------- -----------
(1) Corporate and Other is composed of:
Three Months Nine Months
Ended September 30, Ended September 30,
Amounts in millions 2002 2001 2002 2001
---- ---- ---- ----
Corporate Costs $ (16.6) $ (14.0) $ (52.2) $ (46.5)
Restructuring Expense - Net - - (30.9) (28.8)
Asset Write-Off for WTC - (1.0) - (1.0)
Reorganization Costs - - - 7.0
------------ ------------ ----------- ------------
Total Corporate and Other $ (16.6) $ (15.0) $ (83.1) $ (69.3)
============ ============ =========== ============
(2) Non-Operating Income (Expense)-Net included $6.6 million and $43.0
million of gains on the sales of businesses in the three and nine
months ended September 30, 2001, respectively. Non-Operating Income
(Expense) - Net also included in the third quarter of 2001 a $6.1
million write-down of impaired investments.
D&B's business and financial results have been impacted during the periods
presented by the Company's Blueprint for Growth strategy, as explained below.
Impact of the "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 strengthening our leadership and continuing to promote and
add leaders. In addition, the Company has completed three acquisitions since
launching this business strategy. In North America, D&B acquired iMarket in the
second quarter of 2001 and Harris InfoSource in the fourth quarter of 2001. In
Europe, D&B completed the acquisition of Data House in the third quarter of
2002.
In order to fund these and other investments, D&B has created a flexible
business model whereby the Company has identified, and will continue to
identify, opportunities to reallocate and in some cases reduce spending in
certain areas with the objective of investing for growth and delivering
shareholder value.
Financial Flexibility
In April 2002, the Company announced the third phase of its financial
flexibility program. This third phase is expected to reduce expenses so
approximately $80 million of additional funds can be reallocated for investment
in 2003. Actions to achieve $30 million of ongoing savings have been taken to
date. The Company intends to 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 included $18.6 million for severance,
$10.6 million for the write-off of assets that 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 outsourced certain technology functions to Computer Sciences Corporation
("CSC"). Under the terms of the agreement, approximately 400 D&B 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. 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 $10.0 million, which management considered the fair value for
the assets. This resulted in a $9.7 million impairment loss, as noted above.
The first phase of the financial flexibility program 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 to reflect the Company's determination that severance for approximately
50 employees would not be utilized and that its remaining lease termination
liabilities would be lower than originally estimated. The second phase of the
financial flexibility program reduced expenses to generate approximately $70
million in annualized 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 September 30, 2002, D&B has terminated approximately 2,200 of the
employees affected under all three phases of the financial flexibility program,
including the approximately 400 employees who were transitioned to CSC as
mentioned above. By June 30, 2003, approximately 600 additional employees
worldwide will be terminated in connection with the third phase. The Company
lowered its estimate of the number of employees to be terminated under the third
phase by 100, as it has been able to accomplish the initiatives with fewer
people impacted. This will bring 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 2,800, reflecting the elimination of
3,100 positions (including 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
Net income and earnings per share
For the quarter ended September 30, 2002, D&B reported net income of
$33.2 million, or $.45 per share basic and $.43 per share diluted. This compares
with third quarter 2001 reported net income of $29.1 million and earnings per
share of $.37 basic and $.36 diluted. Thus, 2002 third quarter net income grew
14%, basic earnings per share grew 22% and diluted earnings per share grew 19%,
when compared with the third quarter of 2001. The higher EPS reflects operating
income growth, as well as the continued benefit of share repurchase activity in
the second half of 2001 and first quarter of 2002.
Third quarter 2001 results included a $1.0 million write-off of assets
lost in the World Trade Center attack, a $6.6 million gain on the sale of the
Company's majority stake in its Australia/New Zealand business and the
write-down of certain investments of $6.1 million. Excluding these items, in the
third quarter of 2002, net income would have grown 17%, basic earnings per share
would have grown 25% and diluted earnings per share would have grown 23% over
the same period of 2001.
For the first nine months of 2002, D&B reported net income of $79.0
million, or $1.06 per share basic and $1.03 per share diluted, was down 18% from
the $96.7 million, or $1.21 per share basic and $1.18 per share diluted, in the
same period in 2001. Results for the first nine months of 2002 included net
pre-tax restructuring charge of $30.9 million. In addition to third- quarter
2001 items noted above, the year-to-date 2001 results included a net pre-tax
restructuring charge of $28.8 million, $7.0 million of income resulting from 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 items, net income for the first nine months of 2002 was
$100.6 million, 16% higher than net income of $86.6 million for the same period
in the prior year. Earnings per share would have increased 25% basic and 24%
diluted over the first nine months of 2001, 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.
Revenue
As noted in the Overview section, the Company considers its core
revenue to be that generated from its ongoing businesses. In 2002, total and
core revenue are the same. However, in 2001, total revenue and core revenue
differ by the revenue of Receivable Management Services and other divested
businesses. In the third quarter of 2002, total revenue of $297.2 million was up
2% compared with $290.5 million in the third quarter of 2001, which included
$7.8 million of revenue from Receivable Management Services and other divested
businesses.
Core revenue was up 3% before, and 5% after, the effect of foreign
exchange for the quarter. This was largely driven by core revenue growth in
North America of 6%. Europe reported revenue growth of 4%; however, before the
effect of foreign exchange, European revenue actually declined 5%. In APLA,
revenue declined 4% after the effect of foreign exchange and was flat before the
effect of foreign exchange.
D&B's third-quarter 2002 revenue, before the effect of foreign
exchange, reflects a 1% increase in revenue in Risk Management Solutions, where
traditional products grew 1% and value added products grew 6%; a 7% increase in
Sales & Marketing Solutions, where North American marketing revenue growth of
16% more than offset revenue declines in this solution set internationally; and
a 6% increase in Supply Management Solutions.
For the first nine months of 2002, total revenue was $920.9 million,
down 5% compared with $968.8 million in the same period in 2001, reflecting the
inclusion in 2001 of revenues of $78.3 million from Receivable Management
Services and other divested businesses. Core revenue, which excludes the
divested businesses, increased 3%, both before and after the effect of foreign
exchange, over the prior year's core revenue of $890.5 million. Core revenue in
the first nine months of 2002 increased 5% in North America and 6% in APLA and
was accompanied by flat growth in Europe. Before the effect of foreign exchange,
core revenue was impacted by growth in APLA of 11%, partially offset by a
decline in Europe of 2%.
The results for the first nine months of 2002, before the effect of
foreign exchange, reflect a 1% increase over the same period a year ago in Risk
Management Solutions, where traditional products were flat and value added
products grew 6%, a 9% increase in Sales & Marketing Solutions, where growth of
14% in North America and 7% growth in APLA more than offset a decline of 12% in
Europe; and an 18% increase in Supply Management Solutions, due to growth in
Europe.
Operating costs and operating income
Total operating costs increased 1% in the third quarter of 2002 to
$240.1 million compared with $236.9 million in the third quarter of 2001, as
savings from the financial flexibility program and lower depreciation and
amortization were offset by higher transition costs and investments made to
enhance the business. Operating costs in the third quarter of 2002 also reflect
a $2.4 million reversal of residual accruals in Europe, discussed below.
Operating expenses increased 3% to $100.3 million in the third quarter
of 2002 compared with $97.4 million in the third quarter of 2001, as savings
from financial flexibility initiatives were offset by investments made to
enhance the Company's database and enhance and create products. Selling and
administrative expenses increased 2% to $118.9 million in the third quarter of
2002 compared with $116.2 million in the third quarter of 2001. Administrative
cost savings achieved through the financial flexibility program were offset by
higher transition costs and investments in advertising to reinvigorate the brand
and in training and hiring new leaders. Transition costs were $8.6 million in
the third quarter of 2002, compared to $2.9 million in the third quarter of
2001. Depreciation and amortization decreased 10% to $20.9 million in the third
quarter of 2002 as compared to the third 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.
Year-to-date total operating costs decreased 7% to $770.9 million in
2002 compared with $825.9 million in the same period of 2001. This decline is
primarily a result of cost savings achieved through the financial flexibility
program discussed above, lower depreciation and amortization expense and also
from the sale of the Receivable Management Services business, which offset
higher transition costs and investments made to further the strategy.
Year-to-date total operating costs, excluding the restructuring and
reorganization charges (noted in the table in the Overview section), of $740.0
million in 2002 decreased by 8% from $804.1 million.
Year-to-date total operating expenses were down 10% to $311.3 million
in 2002 compared with $344.7 million in 2001, resulting primarily from cost
savings achieved through the financial flexibility program and the sale of the
Receivable Management Services business, offset by investments made to enhance
the current business. Selling and administrative costs decreased 5% to $368.4
million in the first nine months of 2002 compared to the same period in 2001, as
the savings from financial flexibility initiatives were offset by investments
and higher transition costs. Transition costs were $25.3 million in the first
nine months of 2002, compared with $12.3 million in the same period of 2001.
Depreciation and amortization decreased to $60.3 million in the first nine
months of 2002, a 16% decline compared with 2001, driven by the same factors as
in the quarter.
Operating income increased 7% in the third quarter of 2002 to $57.1
million from $53.6 million in the third quarter of 2001, driven by revenue
growth in the quarter, the reversal of residual accruals in Europe, lower
depreciation and amortization expenses and savings from the financial
flexibility program initiatives. Excluding the World Trade Center write-off on
the table included on page 18, operating income increased 5% from $54.6 million
in the third quarter of 2001.
Operating income for the first the first nine months of 2002 increased
5% to $150.0 million from $142.9 million in 2001, primarily as a result of the
financial flexibility program initiatives, which continue to reduce costs
throughout the Company, and lower depreciation and amortization expenses.
Excluding the same restructuring and reorganization costs included on the table
on page 18, operating income for the first nine months of 2002 was $180.9
million, a 9% increase over the same period in the prior year.
Non-operating items
Non-operating expense -- net was $2.4 million in the third quarter of
2002 compared with non-operating expense -- net of $3.6 million in the third
quarter of 2001. Interest income was $0.7 million and $2.0 million in the third
quarter of 2002 and 2001, respectively. Interest expense of $4.9 million in the
third quarter of 2002 decreased by 4% compared with interest expense of $5.1
million in the third quarter of the prior year. The lower interest income and
interest expense are largely attributable to lower interest rates. Other income
(expense) - net was $1.8 million income in the third quarter of 2002, including
a $2.6 million gain on the sale of a portion of the Company's equity interests
in its Singapore operations. Other income (expense)-net in the third quarter of
2001 was $0.5 million expense, including a gain on the sale of the Company's
majority stake in Australia/New Zealand operations of $6.6 million and the $6.1
million write-down of impaired investments. Excluding the gains on the sales and
the write-down of impaired investments, other income (expense) - net would have
been approximately flat when comparing the third quarter 2002 with the same
period of 2001.
Year-to-date non-operating expense - net was $14.8 million compared
with non-operating income of $21.0 million in the same period of 2001, which
included $43.0 million of gains on the sales of businesses ($6.6 million from
Australia/New Zealand and $36.4 million from Receivable Management Services).
Interest income was $2.0 million compared with $4.3 million during the first
nine months of 2001. Interest expense of $14.8 million in the first nine months
of 2002 decreased compared with $17.3 million in the same period of 2001,
including $11.9 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 $2.0 million expense in the first nine months
of 2002, which includes the $2.6 million gain on the sale of a portion of its
equity interests in the Company's Singapore operations offset by the $2.9
million write-off of its investment in Avantrust LLC, and was income of $34.0
million in 2001, including the gain on the sale of the Receiveables Management
Services and Australia/New Zealand businesses partially offset by the $6.1
million write-down of impaired investments.
D&B's effective and underlying tax rate was 39.2% in the third quarter
of 2002 compared with an effective rate of 38.7% in the third quarter of 2001.
During the third quarter of 2002, the Company adjusted its full-year estimated
underlying tax rate to 38.4% from 38.0%, to include an additional tax liability
for international withholding tax. This adjustment increased the third quarter
2002 effective and underlying rate. The underlying rate, which excludes the
positive impact on taxes of the third-quarter 2001 items identified in the
overview section and in the table on page 18, was 40.9% for the third quarter of
2001. The underlying tax rate has decreased from the prior year 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 40.3% in 2002 compared
with 39.0% in the first nine months of 2001. The underlying rate in the first
nine months of 2002 was 38.4% and was 40.0% in the first nine months of 2001.
The difference between the effective and underlying rates in 2001 was largely
attributable to the favorable tax rate applied to the gains on the sales of
businesses. In both 2002 and 2001, the Company's year-to-date effective tax rate
is negatively impacted by the non-deductibility in some countries of certain
items included within the restructuring charge, which is shown in the tables on
page 18. 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 $1.5 million as equity in net losses of affiliates for
the quarter ended September 30, 2001. For the first nine months of 2002, the
Company recognized $1.7 million as equity in net losses of affiliates, compared
with $3.3 million for the first nine months 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).
Segment Results (see Note 13 to the Consolidated Financial Statements)
North America
North America's total revenue of $211.9 million in the third quarter of 2002
increased 6% from the third quarter of 2001, which had reported revenue of
$200.7 million including $0.4 million of revenue from the divested Receivable
Management Services business. North America's core revenue was $211.9 million in
the third quarter of 2002, up 6% compared with third-quarter 2001 results of
$200.3 million. The revenue increase resulted from growth in Risk Management
Solutions of 3% and in Sales & Marketing Solutions of 16%, partially offset by a
decline in Supply Management Solutions of 2%. Sales & Marketing Solutions
benefited from the acquisition of Harris InfoSource in October 2001. Excluding
the benefit of this acquisition, North America's Sales & Marketing Solutions
would have been up 11%, and its core revenue would have been up 5%.
Risk Management, the Company's largest customer solution set, contributed
$145.9 million or 69% of North America's revenue in the third quarter of 2002.
Traditional Risk Management revenue was up 3%, in part reflecting the benefit of
one more business day in the quarter than last year. Revenue from value added
Risk Management Solutions products was flat.
Sales & Marketing Solutions contributed $60.5 million or 29% of North
America's revenue in the third quarter of 2002. Sales & Marketing Solutions
benefited from growth in traditional marketing revenue. Last year in the third
quarter, customers cut back on discretionary marketing spending. This year,
traditional marketing revenue, which is focused on direct mail and direct
marketing, grew 25%. Value-added Sales & Marketing revenue, which include
web-based decisioning and customer information management solutions, increased
2%.
Supply Management Solutions contributed $5.5 million of revenue in the
third quarter of 2002, slightly lower than in the third quarter of the prior
year.
Year-to-date, North America's total revenue of $671.7 million declined 1%
from $681.9 million for the same period of 2001, which included revenue of $38.9
million from the divested Receivable Management Services business. For the first
nine months, North America's core revenue of $671.7 in 2002 was up 5% from
$643.0 million in 2001. The revenue increase came on the strength of 1% growth
in Risk Management Solutions (with traditional products flat and value added
products up 4%) and 14% growth in Sales & Marketing, partially offset by a 2%
decline in Supply Management Solutions. Contributing to the growth in Sales &
Marketing were the acquisitions of iMarket in the second quarter of 2001 and
Harris Infosource in the fourth quarter of 2001. Excluding the benefit of
acquisitions, Sales & Marketing revenue would have grown 8% and core revenue
would have been up 3%. The year-to-date revenue performance was driven by
factors similar to those in the third quarter.
North America's operating income for the third quarter of 2002 was $67.3
million, up 9% from the $61.9 million reported in the third quarter of 2001.
North America's operating income year-to-date was $218.4 million, up 4% from
$210.0 million in the same period in 2001. North America's operating income
growth reflects revenue growth and generally lower operating cost base due to
the Company's financial flexibility initiatives, 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 total and core revenue of $77.7 million in the third quarter of
2002 increased 4% from $74.5 million in the third quarter of 2001, benefiting
from the positive impact of foreign exchange and the acquisition of Data House,
which contributed $1.6 million in the quarter. Before the effect of foreign
exchange, European third-quarter 2002 revenue would have been down 5% from the
2001 third quarter and, excluding the impact of Data House, would have been down
7%, due to deteriorating market conditions in Europe.
Before the effect of foreign exchange, Risk Management Solutions was down
1%, including the benefit of D&B's acquisition of Data House during the quarter
and 4% excluding the benefit of Data House, reflecting a decline of 4% in
traditional products and an increase of 43% in value added products. Before the
effect of foreign exchange, Sales & Marketing Solutions was down 21% as
customers have cut back on discretionary spending, given the challenging market
conditions in Europe. Before the effect of foreign exchange, Supply Management
Solutions was up 86% on a relatively small base, aided by investments made in
the second half of 2001 to drive growth in this product line.
Europe's year to date 2002 reported revenue of $225.4 million declined 7%
compared with year-to-date 2001 revenue of $242.5 million, which included
revenue of $17.4 million from the divested Receivable Management Services
business. Europe's year-to-date core revenue was $225.4 million, down 2% from
the prior year before the impact of foreign exchange and flat from the prior
year after the effect of foreign exchange, reflecting the weak economy. Before
the effect of foreign exchange, Europe would have reported a year to date 2002
decrease in revenue from Risk Management Solutions of 2% (traditional products
declined by 2% and value added increased by 2%), a decrease in Sales & Marketing
Solutions of 12%, and a substantial percentage increase from Supply Management
Solutions on a relatively small base as mentioned above. Excluding the benefit
of the Data House acquisition, on a year-to-date basis, Risk Management
Solutions would have been down 3% from the prior year.
Europe reported operating income of $5.2 million in the third quarter of
2002, an 8% increase over the $4.7 million reported in the third quarter of
2001. The current quarter's results benefited from a $2.4 million reversal of
residual accruals no longer needed as a result of the restructuring of the
Company's European businesses. In addition, operating income growth benefited
from the positive impact of foreign exchange. Year-to-date 2002, operating
income was $11.9 million, compared with operating income of $2.5 million in
2001.
APLA
APLA's total revenue of $7.6 million in the third quarter of 2002
declined 51% from $15.3 million in the third quarter of 2001, which included
revenue of $7.4 million from Receivable Management Services and other divested
businesses. APLA's core revenue was $7.6 million in the third quarter of 2002,
down 4% compared with third-quarter 2001 core revenue of $7.9 million. Before
the effect of foreign exchange, APLA's core revenue was flat compared with the
same period a year ago. The flat performance, before the effect of foreign
exchange, reflects flat revenue from Risk Management Solutions and a 2% decline
in Sales & Marketing Solutions. Traditional Risk Management Solutions declined
by 7%, while value added Risk Management Solutions increased by 43%.
APLA's year-to-date 2002 total revenue of $23.8 million declined 46%
from $44.4 million in the same period of 2001, which included revenue of $22.0
million from Receivable Management Services and other divested businesses. On a
year-to-date basis, APLA's core revenue for 2002 was $23.8 million, up 6% from
$22.4 million in the same period a year ago. Before the effect of foreign
exchange, core revenue increased 11% compared with the same period in 2001,
primarily resulting from an 11% increase in Risk Management Solutions
(traditional product revenue was up 3% and value added was up 59%) and a 7%
increase in Sales & Marketing Solutions, reflecting solid performance across
most markets as well as a one-time project.
APLA's operating income for the third quarter of 2002 was $1.2 million,
41% below the $2.0 million reported in the third quarter of 2001. The decrease
in operating income was largely attributable to the inclusion of divested
businesses in 2001. Year-to-date, APLA's operating income was $2.8 million, up
from a loss of $0.3 million in the first nine months of 2001. Changes made in
the business model in the region to match investment with growth opportunities
have contributed in the improved profitability.
Business Model Changes in the APLA Segment
D&B continues to implement business model changes in its APLA segment to
match its investment with the growth opportunities of each market. The business
model changes are designed to allow the Company to continue to leverage its
brand globally and expand its global data coverage. During the third quarter of
2002, the Company sold a portion of its equity interests in its Singapore
operations. The Company expects to complete the sale of its Korean operations
during the fourth quarter of 2002.
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 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 third quarter of 2002 compared to the same period in
2001, approximately $0.4 million attributable to North America and $0.9 million
attributable to Europe. For the first nine months of 2002, the reduction was
$3.9 million compared with the first nine months 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 Nine Months Ended
Dollar amounts in millions, except September 30, September 30,
per share data
-------------------------- -------------------------
2002 2001 2002 2001
----------- ----------- ---------- ----------
Reported Net Income $ 33.2 $29.1 $79.0 $ 96.7
Add Back: Goodwill Amortization - 1.3 - 3.9
----------- ----------- ---------- ----------
Adjusted Net Income $ 33.2 $30.4 $79.0 $100.6
=========== =========== ========== ==========
Basic EPS:
Reported Basic EPS $ 0.45 $ 0.37 $ 1.06 $ 1.21
Add Back: Goodwill
Amortization - 0.02 - 0.05
----------- ----------- ---------- ----------
Adjusted Basic EPS $ 0.45 $ 0.39 $ 1.06 $ 1.26
=========== =========== ========== ==========
Diluted EPS:
Reported Diluted EPS $0.43 $ 0.36 $ 1.03 $1.18
Add Back: Goodwill
Amortization - 0.02 - 0.05
----------- ----------- ---------- ----------
Adjusted Diluted EPS $ 0.43 $ 0.38 $ 1.03 $ 1.23
=========== =========== ========== ==========
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 on the Balance Sheet
and are now included in Other Non-Current Assets.
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.
In June 2002, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 146, "Accounting for Costs Associated with
Exit or Disposal Activities ("SFAS No.146"). SFAS No.146 addresses financial
accounting and reporting for costs associated with restructuring activities,
including severance and lease termination obligations. It nullifies Emerging
Issues Task Force ("EITF") Issue No. 94-3,"Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an Action (including
Certain Costs Incurred in a Restructuring)" ("EITF Issue No. 94-3"). The
principal difference between SFAS No. 146 and EITF Issue No.94-3 is in the
timing of liability recognition. SFAS No.146 requires that a liability for a
cost associated with an exit or disposal activity, including severance and lease
termination obligations, be recognized when the liability is incurred, rather
than at the date of a company's commitment to an exit plan. SFAS No. 146 is
effective for exit or disposal activities after December 31, 2002. Adoption of
SFAS No. 146 by D&B may result in expense recognition over a period of time
rather than at one time if D&B undertakes restructuring activities after
December 31, 2002.
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 September 30, 2002, cash and cash equivalents totaled $136.0 million, a
decrease from $145.3 million at December 31, 2001. This $9.3 million decrease
primarily reflects $133.7 million of cash provided from operations, $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 and $10.0
million of net proceeds received in connection with the Company's stock
incentive plans, which were more than offset by $114.2 million used for share
repurchases in the nine months ended September 30, 2002; $22.0 million used for
the acquisition of Data House and $33.9 million of investments in capital
expenditures and capitalized software.
Cash provided by operating activities
Net cash provided by operating activities in the nine months ended September
30, 2002, was $133.7 million, while operating activities in the same period of
2001 provided net cash of $188.2 million. This decrease of $54.5 million 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 five years, which was recorded in deferred revenue.
The remaining difference is due to the loss of cash generated by the Receivable
Management Services business and a change in the core business product mix away
from Risk Management Solutions, which largely consists of annual subscriptions.
During the nine months ended September 30, 2002, D&B made payments of $24.9
million related to restructuring actions under the Blueprint for Growth compared
to $28.9 million for the same period of 2001.
Cash used in investing activities
Net cash used in investing activities totaled $41.6 million in the first
nine months of 2002, compared with net cash provided by investing activities of
$29.9 million in the same period of 2001. During the nine months ended September
30, 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. The
Company also used $22.0 million in the acquisition of Data House and received
$1.3 million in the third quarter of 2002 in connection with the sale of its
interest in its Singapore operations.
In the same period of 2001, the Company received $88.1 million in cash from
the sales of the Receivable Management Services business and the majority stake
in its Australia /New Zealand operations. During the second quarter of 2001, the
Company acquired iMarket for $16.6 million.
Investment in capital expenditures and capitalized software was $33.9
million in the first nine months of 2002 versus $38.4 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 $0.9 million in 2002, compared
with $8.9 million in 2001 for the Company's investments in Avantrust LLC, its
joint venture with AIG which it exited during the second quarter of 2002.
Cash used in financing activities
Net cash used in financing activities was $103.4 million in the nine months
ended September 30, 2002, compared with net cash used in financing activities of
$118.8 million during the same period of 2001. In the nine months ended
September 30, 2002, cash used in financing activities was largely attributable
to the purchase of treasury shares, while in the same period of 2001, it was
attributable to both the purchase of treasury shares and the repayment of debt.
In January 2002, the Company acquired 2.5 million of its shares in a
privately-negotiated block trade for $85.1 million, funded with cash on hand and
short-term commercial paper borrowings. At September 30, 2002, the Company had
no commercial paper borrowings outstanding.
In the first nine months of 2002, D&B repurchased 756,100 shares of common
stock for $29.1 million to mitigate the dilutive effect of shares issued under
the Company's stock incentive plans and in connection with its Employee Stock
Purchase Plan. Net proceeds from D&B stock plans totaled $10.0 million in the
first nine months of 2002.
In the first nine months of 2001, D&B repurchased 1,388,340 shares of its
common stock for $38.2 million to offset a portion of the shares issued under
the Company's stock incentive plans and in connection with its Employee Stock
Purchase Plan. Proceeds received in connection with the Company's stock plans
were $16.2 million in the first nine months of 2001. In addition, the Company
repurchased 1,568,683 shares for $46.0 million during the second and third
quarters 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 nine months ended
September 30, 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 September 30, 2001, had no commercial paper
borrowings outstanding.
D&B's $175 million 364-day revolving credit facility expired in September
2002. The Company renewed this facility in September 2002 for $100 million. 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 September 30, 2002. The Company decided to renew its 364-day
facility at a lower level 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
including any payments that may be required to settle legal or tax proceedings
as discussed in Note 7 - Contingencies to the Consolidated Financial Statements.
Subsequent Developments
The Company has announced the sale of its Korean operations during the
fourth quarter of 2002. D&B expects to receive proceeds of approximately $3
million, consisting of $1.8 million in cash and a note for $1.2 million payable
over the 12 months following the closing. The Company expects to record a
pre-tax gain of approximately $2 million within Other Income (Expense) - Net.
Also, during October 2002, the Company announced that its Board of
Directors authorized a share repurchase program of up to $100 million. This
two-year program is in addition to the Company's existing share repurchase
program that is designed to offset the dilutive effect of shares issued under
employee benefit arrangements.
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," "intends," "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 Form 10-K for the year ended December 31,
2001, include: the possibility that economic or other conditions might lead to a
reduction in the demand for D&B products and services worldwide and/or the
lengthening of sales cycles; 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 and
services 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,
use and distribute data; and D&B's ability to attract and retain key employees.
D&B undertakes no obligation 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 September 30, 2002, no material change had occurred in the Company's market
risks, compared with the disclosure in the Form 10-K for the year ending
December 31, 2001.
Item 4. Controls and Procedures
Within 90 days prior to the filing date of this report, the Company
carried out an evaluation, under the supervision and with the participation of
the Company's management, including the Company's Chief Executive Officer and
Chief Financial Officer, of the effectiveness and the design and operation of
the Company's disclosure controls and procedures pursuant to Rule 13a-14 of the
Securities Exchange Act of 1934. Based upon that evaluation, the Chief Executive
Officer and Chief Financial Officer concluded that the Company's disclosure
controls and procedures are effective in timely alerting them to material
information relating to the Company required to be included in the Company's
periodic SEC filings. Since the date of the Company's most recent evaluation,
there were no significant changes in the Company's internal controls or in other
factors that could significantly affect these controls, including any corrective
actions with regard to significant deficiencies and material weaknesses.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Information in response to this Item is included in Note 7 - Contingencies on
Pages 11-15 in Part I, Item 1, of this Form 10-Q.
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits:
Exhibit 4.4 -Amended and Restated Credit Agreement dated as of September
6, 2002 among The Dun & Bradstreet Corporation, JPMorgan Chase Bank,
Citibank, N.A., Bank of Tokyo-Mitsubishi Trust Company, The Bank of New
York and The Northern Trust Company.
(b) Reports on Form 8-K:
The Company filed a Current Report on Form 8-K on August 13, 2002,
covering Item 9 (Regulation FD Disclosure).
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: November 6, 2002 By: /s/ Sara Mathew
------------------------------------------------
Sara Mathew
Senior Vice President and Chief Financial Officer
Date: November 6, 2002 By: /s/ Mary Jane Raymond
-------------------------------------------------
Mary Jane Raymond
Vice President and Corporate Controller
Certification of the Chairman and Chief Executive Officer
I, Allan Z. Loren, certify that:
1. I have reviewed this quarterly report on Form 10-Q of The Dun and Bradstreet
Corporation (the "Company") for the quarter ended September 30, 2002;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The Company's other certifying officers and I are responsible for establishing and
maintaining disclosure controls and procedures for the Company and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the Company's disclosure controls
and procedures as of a date within 90 days prior to the filing
date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of the
disclosure controls and procedures based on our evaluation as of the Evaluation Date;
5. The Company's other certifying officers and I have disclosed, based on our
most recent evaluation, to the auditors and the audit committee of the
Company's board of directors:
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect our ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses
in internal controls; and
b) any fraud, whether or not material, that involves management or other employees who
have a significant role in the registrant's internal controls; and
6. The Company's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 6, 2002 By: /s/ Allan Z. Loren
--------------------------------------------------
Allan Z. Loren
Chairman and Chief Executive Officer
Certification of the Chief Financial Officer
I, Sara Mathew, certify that:
7. I have reviewed this quarterly report on Form 10-Q of The Dun and Bradstreet
Corporation (the "Company") for the quarter ended September 30, 2002;
8. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
9. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
10. The Company's other certifying officers and I are responsible for establishing and
maintaining disclosure controls and procedures for the Company and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the Company's disclosure controls
and procedures as of a date within 90 days prior to the filing
date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of the
disclosure controls and procedures based on our evaluation as of the Evaluation Date;
11. The Company's other certifying officers and I have disclosed, based on our
most recent evaluation, to the auditors and the audit committee of the
Company's board of directors:
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect our ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses
in internal controls; and
b) any fraud, whether or not material, that involves management or other employees who
have a significant role in the registrant's internal controls; and
12. The Company's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 6, 2002 By: /s/ Sara Mathew
----------------------------------------------------
Sara Mathew
Senior Vice President and Chief Financial Officer