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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 March 31, 2003
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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.)
103 JFK Parkway, Short Hills, NJ 07078
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- ----------------------------------------------------------- -----------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (973) 921-5500
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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 by check mark whether the registrant is on accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). 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
Common Stock, at March 31, 2003
par value $0.01 per share 74,450,599
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 Months Ended March 31, 2003 and 2002 3
Consolidated Balance Sheets
March 31, 2003 (Unaudited) and December 31, 2002 4
Consolidated Statements of Cash Flows (Unaudited)
Three Months Ended March 31, 2003 and 2002 5
Notes to Consolidated Financial Statements (Unaudited) 6-18
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 19-30
Item 3. Quantitative and Qualitative Disclosures About Market Risk 31
Item 4. Controls and Procedures 31-32
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 33
Item 6. Exhibits and Reports on Form 8-K 33
SIGNATURES 34-36
- ----------
The Dun & Bradstreet Corporation and Subsidiaries
Consolidated Statements of Operations (Unaudited)
Amounts in millions, except per share data
Three Months Ended
March 31,
2003 2002
---- - ----
Revenue $ 314.7 $ 314.7
Operating Expenses 106.1 108.8
Selling and Administrative Expenses 125.9 127.4
Depreciation and Amortization 16.2 19.5
Restructuring Charge 10.9 -
------ ------
Operating Costs 259.1 255.7
------ ------
Operating Income 55.6 59.0
------ ------
Interest Income 0.8 0.7
Interest Expense (4.5) (5.0)
Other Income (Expense) - Net 6.8 (0.3)
------ ------
Non-Operating Income (Expense) - Net 3.1 (4.6)
------
Income Before Provision for Income Taxes 58.7 54.4
Provision for Income Tax 21.6 20.4
Equity in Net Losses of Affiliates - (0.5)
----- ------
Net Income $ 37.1 $ 33.5
========== ==========
Basic Earnings per Share of Common Stock $ 0.50 $ 0.45
========== ==========
Diluted Earnings per Share of Common Stock $ 0.48 $ 0.43
========== ==========
Weighted Average Number of Shares Outstanding - Basic 74,448,000 74,986,000
Weighted Average Number of Shares Outstanding - Diluted 76,707,000 77,884,000
The accompanying notes are an integral part of the consolidated financial
statements.
The Dun & Bradstreet Corporation and Subsidiaries
Consolidated Balance Sheets
Amounts in millions, except per share data
(Unaudited)
March 31, December 31,
2003 2002
---- ----
Assets
Current Assets
Cash and Cash Equivalents $ 149.3 $ 191.9
Accounts Receivable, Net of Allowance of $22.4 at March 31, 2003 and $23.0
at December 31, 2002 321.1 334.9
Other Receivables 46.1 48.3
Other Current Assets 36.1 39.1
----------- -----------
Total Current Assets 552.6 614.2
---------- ----------
Non-Current Assets
Property, Plant and Equipment, Net 152.1 149.7
Prepaid Pension Costs 379.7 367.3
Computer Software, Net 61.0 69.5
Goodwill, Net 259.5 183.3
Deferred Income Taxes 92.3 81.9
Other Non-Current Assets 85.2 61.8
----------- -----------
Total Non-Current Assets 1,029.8 913.5
---------- ----------
Total Assets $1,582.4 $1,527.7
======== =========
Current Liabilities
Accounts and Notes Payable $ 32.9 $ 47.5
Accrued Payroll 64.8 102.2
Accrued Income Tax 49.3 49.3
Other Accrued and Current Liabilities 167.2 152.0
Deferred Revenue 424.2 367.1
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Total Current Liabilities 738.4 718.1
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Pension and Postretirement Benefits 443.7 441.5
Long Term Debt 299.8 299.9
Other Non-Current Liabilities 86.1 87.0
Contingencies (Note 7)
Shareholder's Equity
Preferred Stock, $0.01 par value per share, authorized -
10,000,000 shares; outstanding - none
Series Common Stock, $0.01 par value per share, authorized - 10,000,000 shares;
outstanding - none
Common Stock, $0.01 par value per share, authorized - 200,000,000 shares; issued
- 81,945,520 0.8 0.8
Unearned Compensation Restricted Stock (4.6) (0.6)
Capital Surplus 215.0 218.7
Retained Earnings 321.0 284.0
Treasury Stock, at cost, 7,494,921 and 7,586,604 shares at March 31, 2003 and
December 31, 2002, respectively (238.0) (240.3)
Cumulative Translation Adjustment (192.6) (194.2)
Minimum Pension Liability Adjustment (87.2) (87.2)
------------ -----------
Total Shareholders' Equity 14.4 (18.8)
----------- -----------
Total Liabilities and Shareholders' Equity $1,582.4 $1,527.7
========== ==========
The accompanying notes are an integral part of the consolidated financial
statements.
The Dun & Bradstreet Corporation and Subsidiaries
Consolidated Statements of Cash Flows (Unaudited)
Amounts in millions
Three Months Ended
March 31
2003 2002
---- ----
Cash Flows from Operating Activities:
Net Income $ 37.1 $ 33.5
Reconciliation of Net Income to Net Cash Provided by Operating Activities:
Depreciation and Amortization 16.2 19.5
Gain from Sales of Businesses (0.4) -
Equity Losses in Excess of Dividends Received from Affiliates - 0.5
Restructuring Charge, Net and Other Asset Impairments 10.9 -
Restructuring Payments (8.6) (6.5)
Deferred Income Taxes (0.5) 9.2
Accrued Income Taxes, Net 18.9 3.5
Other 2.3 2.6
Changes in Current Assets and Liabilities:
Decrease (Increase) in Accounts Receivable 21.6 (29.4)
Net (Increase) Decrease in Other Current Assets (0.6) 1.3
Net Increase in Deferred Revenue 43.9 43.3
Net Decrease in Accounts Payable (16.0) (4.8)
Net Decrease in Accrued Liabilities (46.7) (47.9)
Net Decrease in Other Current Liabilities (6.2) (5.5)
Changes in Non-Current Assets and Liabilities:
Increase in Other Long Term Assets (14.3) (13.9)
Net Increase in Long Term Liabilities 3.1 2.1
------ ------
Net Cash Provided by Operating Activities 60.7 7.5
------ ------
Cash Flows from Investing Activities:
Investments in Marketable Securities (7.4) -
Cash Proceeds from Sales of Businesses 0.7 -
Payments for Acquisitions of Businesses, Net of Cash Acquired (82.8) -
Capital Expenditures (3.7) (3.3)
Additions to Computer Software and Other Intangibles (2.2) (6.0)
Investments in Unconsolidated Affiliates - (0.9)
Other (0.9) 1.1
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Net Cash Used in Investing Activities (96.3) (9.1)
------------ -------------
Cash Flows from Financing Activities:
Payments for Purchases of Treasury Shares (13.2) (95.2)
Net Proceeds from Stock Plans 4.9 5.9
Increase in Commercial Paper Borrowings - 35.6
Other 0.2 0.2
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Net Cash Used in Financing Activities (8.1) (53.5)
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Effect of Exchange Rate Changes on Cash and Cash Equivalents 1.1 (0.8)
------------ -------------
Decrease in Cash and Cash Equivalents (42.6) (55.9)
Cash and Cash Equivalents, Beginning of Period 191.9 145.3
----------- ------------
Cash and Cash Equivalents, End of Period $ 149.3 $ 89.4
=========== ============
Supplemental Disclosure of Cash Flow Information:
Cash Paid
Income Taxes, Net of Refunds $ 4.4 $ 4.4
Interest Expense $ 8.5 $ 9.2
The accompanying notes are an integral part of the consolidated financial
statements.
THE DUN & BRADSTREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Tabular dollar amounts in millions, except per share data) Note 1 - Basis of
Presentation
These interim consolidated financial statements have been prepared in
accordance with the instructions to Form 10-Q and should be read in conjunction
with the consolidated financial statements and related notes of The Dun &
Bradstreet Corporation's ("D&B" or "We") Annual Report on Form 10-K for the year
ended December 31, 2002. The consolidated results for interim periods are not
necessarily indicative of results for the full year or any subsequent period. In
the opinion of our management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation of financial position,
results of operations and cash flows at the dates and for the periods presented
have been included. We have reclassified certain prior period amounts to conform
to our current presentation.
Note 2 - Recent Accounting Pronouncements
In June 2002, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 146, "Accounting for
Costs Associated with Exit or Disposal Activities." 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)." The principal difference
between SFAS No. 146 and EITF Issue No. 94-3 is 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. Our adoption of SFAS No.
146 will result in expense recognition over a period of time rather than at one
time for the restructuring activities we undertake after December 31, 2002.
In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure." FASB No. 148 amends SFAS
No. 123, "Accounting for Stock-Based Compensation," to provide alternative
methods of transition to the fair-value method of accounting for stock-based
employee compensation. SFAS No. 148 does not amend SFAS No. 123 to require
companies to account for their employee stock-based awards using the fair-value
method. We will continue to utilize the instrinsic method of accounting for
stock-based compensation as allowed in APB Opinion No. 25, "Accounting for Stock
Issued to Employees."
SFAS No. 148 also amends the disclosure provisions of SFAS No. 123 to
require disclosure of the effects of an entity's accounting policy with respect
to stock-based employee compensation on reported net income and earnings per
share. In the table below, we disclose this effect.
Three Months
Ended March 31,
2003 2002
----------------- -----------------
Reported Net Income $ 37.1 $ 33.5
Add: Stock compensation cost included in net income,
net of tax benefit 0.3 0.2
Deduct: Total stock compensation cost under fair-value
method for all awards, net of tax benefits (2.5) (1.9)
------- -------
Pro forma Net Income $ 34.9 $ 31.8
====== =======
Basic EPS:
As reported $ 0.50 $ 0.45
====== ======
Pro forma $ 0.47 $ 0.42
====== ======
Diluted EPS:
As reported $ 0.48 $ 0.43
====== =======
Pro forma $ 0.45 $ 0.41
====== =======
In November 2002, the FASB issued FASB Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness to Others" ("FIN No. 45"), which expands previously
issued accounting guidance and disclosure requirements for certain guarantees.
Under the provisions of FIN No. 45, we are required to recognize an initial
liability for the fair value of an obligation assumed by issuing a guarantee.
The provision for initial recognition and measurement of the liability will be
applied on a prospective basis to guarantees issued or modified after December
31, 2002. In certain circumstances, we issue guarantee letters on behalf of our
international wholly-owned subsidiaries for specific situations. We do not
expect the adoption of FIN No. 45 will have a material impact on our
consolidated financial statements.
In January 2003, the FASB issued FASB Interpretation No. 46, "Consolidation
of Variable Interest Entities" ("FIN 46"), which amended Accounting Research
Bulletin No. 51, "Consolidated Financial Statements," and established standards
for determining under what circumstances a variable interest entity ("VIE")
should be consolidated with its primary beneficiary. FIN 46 also requires
disclosure about VIEs that the company is not required to consolidate but in
which it has a significant variable interest. The consolidation requirements of
FIN 46 apply immediately to VIEs created after January 31, 2003. The
consolidation requirements apply to older entities in the first fiscal year or
interim period beginning after June 15, 2003. We do not expect the adoption of
FIN 46 will have a material impact on our consolidated financial statements.
In November 2002, the FASB's Emerging Issues Task Force reached a final
consensus on Issue No. 00-21, "Revenue Arrangements with Multiple Elements"
("EITF No. 00-21"), which provides guidance on how arrangement consideration
should be measured, whether the arrangement should be divided into separate
units of accounting, and how the arrangement consideration should be allocated
among the separate units of accounting. EITF No. 00-21 also requires disclosure
of the accounting policy for recognition of revenue from multiple-element
arrangements and the description and nature of such arrangements. The guidance
of EITF No. 00-21 is effective for revenue arrangements entered into in fiscal
periods beginning after June 15, 2003. Alternatively, EITF No. 00-21's guidance
may be accounted for and reported as a cumulative-effect adjustment. We are
currently assessing the impact on our consolidated financial statements of
applying the guidance of EITF No. 00-21 to our multiple-element arrangements.
Note 3 - Impact of Implementation of the Blueprint for Growth Strategy
Since the launch of our Blueprint for Growth strategy, we have
implemented four phases of Financial Flexibility initiatives. In each of these
phases, we have incurred a restructuring charge, which generally consists of
employee severance and termination costs, asset write-offs, and/or costs to
terminate lease obligations.
During the first quarter of 2003, we recognized a $10.9 million
restructuring charge in connection with the fourth phase of our Financial
Flexibility program in accordance with SFAS No. 146. The charge included $10.6
million for severance and termination costs related to approximately 350
employees (including a $0.5 million pension plan curtailment charge due to the
fourth phase headcount actions discussed in the following paragraph) and $0.3
million for lease termination obligations. Under SFAS No. 146, this amount
represents the liabilities incurred during the quarter for each of these
obligations and additional restructuring charges will be incurred throughout
2003, primarily in the second and third quarter, as additional program actions
are taken. In total, we expect to record approximately $16.4 million for all
restructuring charges related to the fourth phase of our Financial Flexibility
program, including $16.1 million for severance and termination costs related to
approximately 550 employees and $0.3 million for lease termination obligations.
In accordance with SFAS No. 87 and SFAS No. 88, we are required to
recognize a one-time curtailment charge for the estimated pension expense impact
to the Dun & Bradstreet Corporation Retirement Account (the "U.S. Qualified
Plan") related to the headcount actions of the fourth phase of our Financial
Flexibility program announced on January 13, 2003. The curtailment accounting
requirement of SFAS No. 88 requires us to recognize immediately a pro-rata
portion of the unrecognized prior service cost and the cost of any special
charges related to benefit enhancements that might occur as a result of the
layoffs (e.g., full vesting). For the U.S. Qualified Plan, these items together
resulted in an immediate curtailment charge to earnings of $0.5 million in first
quarter 2003, included in the $10.9 million charge above.
During the second quarter of 2002, we recognized a $30.9 million
restructuring charge in connection with the third phase of our Financial
Flexibility program. The charge included $18.6 million for severance and
termination costs related to approximately 1,050 employees, $10.6 million for
the write-off of assets that were sold or abandoned (including $9.7 million from
the outsourcing action discussed in the following paragraph), and $1.7 million
for lease termination obligations.
As part of this third phase of the Financial Flexibility program, we
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 our data center and
printmail facility located in Berkeley Heights, New Jersey, and related assets
for $10 million, which we considered the fair value for the assets. This
resulted in a $9.7 million impairment loss.
During the second quarter of 2001, we incurred a $32.8 million
restructuring charge as part of the second phase of our Financial Flexibility
program to re-engineer administrative functions and institute common business
practices worldwide, comprised of $20.7 million for severance costs related to
approximately 800 employees, $3.2 million for lease termination obligations and
$8.9 million for the write-off of assets that were abandoned in the
consolidation of offices, primarily in Europe. During 2001, we also reversed
$4.0 million of the charge taken in 2000 related to the first phase of our
Financial Flexibility program. We determined that severance for 50 people would
not be utilized, due to higher than anticipated voluntary attrition ($2.9
million), and that the remaining lease termination obligations would be lower
than originally estimated as a result of more favorable market conditions and
higher than anticipated sub-lease rent ($1.1 million).
During 2000, we incurred a $41.5 million restructuring charge related to
the implementation of the first phase of our Financial Flexibility program to
globalize administrative functions, streamline data collection and fulfillment,
rationalize Sales & Marketing functions and consolidate and simplify technology
functions. The charge included $28.2 million for severance related to
approximately 900 employees, $8.8 million for lease termination obligations for
office closures in North America and Europe and $4.5 million for the write-off
of assets that were abandoned or impaired.
As of March 31, 2003, we have terminated approximately 2,700 of the 3,250
employees affected under all four phases of the Financial Flexibility program,
including the approximately 400 employees who were transitioned to CSC, as
mentioned above. By June 30, 2003, approximately 200 additional employees
worldwide will be terminated in connection with the third phase. By July 31,
2003, approximately 550 additional employees worldwide will have their positions
terminated in connection with the fourth phase. This will bring the total number
of employees terminated (via termination and voluntary attrition) in connection
with the four phases of the Financial Flexibility program, since its inception
in October 2000, to approximately 3,250, reflecting the elimination of 3,550
positions (including 300 open positions).
The following table sets forth the restructuring reserves and utilization
to date related to the fourth phase of our Financial Flexibility program in
accordance with SFAS No. 146.
Lease
Severance and Pension Termination
Termination Curtailment Obligations Total
Total Charge to be Incurred during 2003 $ 15.6 $ 0.5 $ 0.3 $ 16.4
======== ======= ======= =======
Charge Taken during First Quarter 2003 $ 10.1 $ 0.5 $ 0.3 $ 10.9
Payments/Curtailment as of March 31, 2003 (2.6) (0.5) - (3.1)
--------- ------ ------- -------
Balance Remaining as of March 31, 2003 $ 7.5 $ - $ 0.3 $ 7.8
========= ======= ======= ========
The following table sets forth the reserves and utilization to date related
to the first, second and third phases of our Financial Flexibility program under
the requirements of EITF No. 94-3 (see Note 2).
2001 First
2000 Payments/ Quarter
Original Payments/ Write-offs/ Balance at 2002 Balance at 2003 Balance at
Charge Write-offs Adjustments 12/31/2001 Payments 12/31/2002 Payments 3/31/2003
2002 (Phase III)
Restructuring
Charge for:
Severance and
Termination $18.6 - - - $ (7.3) $ 11.3 $ (4.6) $ 6.7
Asset Write-Offs 10.6 - - - (10.6) - - -
Lease Termination
Obligations 1.7 - - - (0.2) 1.5 - 1.5
-------- ----------- ----------- ----------- --------- --------- ---------- ---------
$30.9 - - - $ (18.1) $ 12.8 $ (4.6) $ 8.2
====== =========== =========== =========== ======== ======= ======== ========
2001 (Phase II)
Restructuring
Charge for:
Severance and
Termination $20.7 - $ (1.5) $19.2 $(18.0) $1.2 $(0.9) $0.3
Asset Write-Offs 8.9 - (8.9) - - - - -
Lease Termination
Obligations 3.2 - (1.6) 1.6 (0.6) 1.0 - 1.0
------- ---------- -------- ------- --------- -------- --------- -------
$32.8 - $ (12.0) $ 20.8 $(18.6) $ 2.2 $ (0.9) $ 1.3
======= ========== ======== ====== ======= ======= ======= ======
2000 (Phase I)
Restructuring
Charge for:
Severance and
Termination $28.2 $ (0.8) $(23.0) $ 4.4 $ (3.9) $ 0.5 $(0.4) $ 0.1
Asset Write-Offs 4.5 (4.5) - - - - - -
Lease Termination
Obligations 8.8 - (4.8) 4.0 (1.3) 2.7 (0.1) 2.6
------- -------- --------- ------- --------- -------- -------- -------
$41.5 $ (5.3) $(27.8) $ 8.4 $ (5.2) $ 3.2 $ (0.5) $ 2.7
===== ======= ======= ====== ======== ======= ======= ======
We completed all the actions contemplated under the first phase of our
Financial Flexibility program by the end of 2001, completed the actions under
the second phase by June 30, 2002, and will complete the actions under the third
phase by June 30, 2003. The remaining reserves for the 2001 and 2000
restructuring charges relate to future severance payments for actions already
taken for a limited number of former senior executives and for lease termination
obligations to be paid in the future.
Note 4 - Notes Payable and Indebtedness
Our borrowings at March 31, 2003 and December 31, 2002, including interest
rate swaps designated as hedges, are summarized below:
March 31, 2003 December 31, 2002
Liab (Asset) Liab (Asset)
Notes Payable $ 0.1 $ 0.1
--------- -----------
Fair Value Of Long-Term Fixed Rate Notes $ 305.3 $ 305.7
Fair Value Of Interest-Rate Swaps (5.6) (6.0)
Other 0.1 0.2
------- ----------
Long Term Debt $ 299.8 $ 299.9
========= ===========
Note 5 -Reconciliation of Weighted Average Shares
Three Months Ended
March 31,
2003 2002
---- ----
(Shares data in thousands)
Weighted average number of shares-basic 74,448 74,986
Dilutive effect of shares issuable under stock options, restricted
stock and performance share plans 2,138 2,741
Adjustment of shares applicable to stock options exercised during
the period and performance share plans 121 157
-------- -------
Weighted average number of shares-diluted 76,707 77,884
====== ======
During the first quarter of 2003 and 2002, we repurchased 70,000 and
244,800 shares for $2.4 million and $10.1 million, respectively, to mitigate the
dilutive effect of the shares issued under our stock incentive plans and
Employee Stock Purchase Plan. During the first quarter of 2003, we also
repurchased 314,500 shares in connection with a previously announced $100
million share repurchase program for $10.8 million. During the first quarter of
2002, we also repurchased 2.5 million shares at the market price of $85.1
million, in a privately negotiated block trade.
Options to purchase 1,556,120 and 4,300 shares of common stock at March
31, 2003 and 2002, 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. Our options generally expire 10 years
after the grant date.
Note 6 - Comprehensive Income
Total comprehensive income for the three-month ended March 31, 2003 and
2002, which includes net income and other gains and losses that affect
shareholders' equity, was as follows:
Three Months Ended March 31,
2003 2002
---- ----
Net Income $ 37.1 $ 33.5
Other Comprehensive Income (Loss)
Foreign Currency Translation Adjustment 1.6 0.4
Unrealized Losses On Investments - (0.2)
-------- -------
Total Comprehensive Income $ 38.7 $ 33.7
====== ======
Note 7 - Contingencies
We are involved in tax and legal proceedings, claims and litigation
arising in the ordinary course of business. We periodically assess our
liabilities and contingencies in connection with these matters based upon the
latest information available. For those matters where it is probable that we
have incurred a loss and the loss or range of loss can be reasonably estimated,
we have recorded reserves in our consolidated financial statements. In other
instances, we are unable to make a reasonable estimate of any liability because
of the uncertainties related to both the probable outcome and amount or range of
loss. As additional information becomes available, we adjust our assessment and
estimates of such liabilities accordingly.
Based on our review of the latest information available, we believe our
ultimate liability in connection with pending tax and legal proceedings, claims
and litigation will not have a material effect on our results of operations,
cash flows or financial position, with the possible exception of the matters
described below.
In order to understand our exposure to the potential liabilities described
below, it is important to understand the relationship between us and Moody's
Corporation, our predecessors and other parties that, through various corporate
reorganizations and contractual commitments, have assumed varying degrees of
responsibility with respect to such matters.
In November 1996, the company then known as The Dun & Bradstreet
Corporation ("D&B1") separated through a spin-off into three separate public
companies: D&B1, ACNielsen Corporation ("ACNielsen") and Cognizant Corporation
("Cognizant") (the "1996 Distribution"). In June 1998, D&B1 separated through a
spin-off into two separate public companies: D&B1, which changed its name to
R.H. Donnelley Corporation ("Donnelley/D&B1"), and a new company named The Dun &
Bradstreet Corporation ("D&B2") (the "1998 Distribution"). During 1998,
Cognizant separated through a spin-off into two separate public companies: IMS
Health Incorporated ("IMS") and Nielsen Media Research, Inc. ("NMR") (the "1998
Cognizant Distribution"). In September 2000, D&B2 separated through a spin-off
into two separate public companies: D&B2, which changed its name to Moody's
Corporation ("Moody's"), and a new company named The Dun & Bradstreet
Corporation ("we" or "D&B3" and also referred to elsewhere in this Form 10-Q as
"D&B") (the "2000 Distribution").
Tax Matters
D&B2 and its predecessors entered into global tax planning
initiatives in the normal course of business, principally through tax-free
restructurings of both their foreign and domestic operations. The status of
Internal Revenue Service reviews of these initiatives is summarized below.
Pursuant to a series of agreements, IMS and NMR are jointly and severally
liable for and must pay one-half, and we and Moody's are jointly and severally
liable for and must pay the other half, of any payments over $137 million for
taxes, accrued interest and other amounts resulting from unfavorable IRS rulings
on the tax matters summarized below (other than the matter summarized below as
"Amortization Expense Deductions -- 1997-2002," for which we and Moody's are
solely responsible). D&B2 was contractually obligated to pay, and did pay, the
first $137 million in connection with the matter summarized below as
"Utilization of Capital Losses -- 1989-1990."
Under the terms of the 2000 Distribution, we and Moody's have 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
each party's 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 notice of adjustment. 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. D&B2 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. We are continuing to contest, on behalf of
Donnelley/D&B1, the IRS's formal assessment and would also contest any
assessment of amounts in excess of the amounts paid. Donnelley/D&B1 filed a
complaint for a refund in the U.S. District Court on September 21, 2000. The
case is expected to go to trial in 2004. We would share responsibility for any
additional assessment, and share in any refund obtained, with IMS, NMR and
Moody's, as disclosed above.
Subsequent to making its 2000 payment to the IRS, IMS sought to obtain
partial reimbursement from NMR under the terms of the 1998 Cognizant
Distribution. NMR paid IMS less than IMS sought. In 2001, IMS filed an
arbitration proceeding against NMR claiming that NMR underpaid to IMS its proper
allocation of the above tax payments. Neither Donnelley/D&B1 nor we are a party
to the 1998 Cognizant Distribution. IMS nonetheless sought to include
Donnelley/D&B1 in this arbitration, arguing that if NMR should prevail in its
interpretation, then IMS could seek the same interpretation in an alternative
claim against Donnelley/D&B1. In 2002, the arbitration panel ruled that
Donnelley/D&B1 properly belonged as a party to the arbitration. Hearings before
the arbitration panel were held in 2002. In April 2003, the arbitration panel
found in favor of IMS on its claim against NMR and dismissed IMS' alternative
claim against Donnelley/D&B1.
Royalty Expense Deductions - 1994-1996. In the second quarter of 2002, we
received on behalf of Donnelley/D&B1 Notices of Proposed Adjustment from the IRS
with respect to a partnership transaction entered into in 1993. Specifically,
the IRS proposed to disallow certain royalty expense deductions claimed by
Donnelley/D&B1 on its 1994, 1995 and 1996 tax returns. In verbal communications
with the IRS later in 2002, the IRS expressed a willingness to withdraw its
proposed disallowance of related royalty expense deductions for 1994, but in a
February 2003 letter the IRS asserted a position that would disallow a portion
of the 1994 royalty expense deduction. The IRS has also indicated its intention
to assert penalties for 1995 and 1996.
We have disagreed with the positions taken by the IRS. However, if the IRS
were to issue a formal assessment and prevail, we would share responsibility for
the assessment with Moody's, IMS and NMR, as disclosed above. If the IRS were to
issue a formal assessment and we, on behalf of Donnelley/D&B1, were to challenge
the assessment in U.S. District Court rather than in U.S. Tax Court, the
disputed amounts would need to be paid. We estimate that the disallowance of the
1994 royalty expense deduction would result in a loss of $5 million in tax
refunds. We also estimate that the disallowance of the 1995 and 1996 royalty
expense deductions would require payment from us of up to $42 million (tax,
interest and penalties, net of associated tax benefits).
In addition, in February 2003, the partnership associated with this
transaction received a preliminary notice from the IRS that challenges the tax
treatment of certain royalty payments received by the partnership in which
Donnelley/D&B1 was a partner (and which relate to the royalty expense deductions
referred to above). The IRS would reallocate certain partnership income to
Donnelley/D&B1, and we would share responsibility for this matter with Moody's,
IMS and NMR, as disclosed above. Our share of this income would require an
additional payment from us of $20 million (tax, interest and penalties, net of
associated tax benefits). We have disagreed with the position taken by the IRS
on behalf of the partnership, in part because this position is inconsistent with
the IRS' position with respect to the royalty expense deductions described
above.
Amortization Expense Deductions - 1997-2002. The IRS has requested documentation
with respect to a transaction entered into in 1997 by Donnelley/D&B1 that
produces amortization expense deductions. While we believe the deductions are
appropriate, the IRS could ultimately challenge them and issue an assessment. If
the IRS were to prevail or the assessment were to be challenged by us in U.S.
District Court, we estimate that our cash payment to the IRS with respect to
deductions claimed to date and including any potential assessment of penalties
of $6.8 million, could be up to $45.6 million (tax, interest and penalties, net
of associated tax benefits). This transaction is scheduled to expire in 2012
and, unless earlier terminated by us, our cash exposure, based on current
interest rates and tax rates, would increase at a rate of approximately $2.3
million per quarter (including potential penalties) as future amortization
expenses are deducted.
* * * * * * * * *
We have considered the foregoing tax matters and the merits of the legal
defenses and the various contractual obligations in our overall assessment of
potential tax liabilities and believe we have adequate reserves recorded in the
Consolidated Financial Statements for our share of the current exposures in
these matters. Any payments that would be made for these exposures would be
significant to us in the period a cash payment took place.
Legal Proceedings
Information Resources, Inc.
In July 1996, Information Resources, Inc. ("IRI"), filed a complaint in
the U.S. District Court for the Southern District of New York, naming as
defendants D&B1, A.C. Nielsen Company (a subsidiary of ACNielsen) and IMS
International, Inc. (at the time a subsidiary of Cognizant). At the time of the
filing of the complaint, each of the other defendants was a wholly-owned
subsidiary of D&B1.
The complaint alleges various violations of United States antitrust laws,
including alleged violations of Sections 1 and 2 of the Sherman Antitrust 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.
In April 2003, the court denied a motion for partial summary judgement by
defendants that sought to dismiss certain of IRI's claims. No trial date has
been set in this matter and discovery is ongoing. The court has scheduled a
conference with the parties for May 21, 2003.
In connection with the 1996 Distribution, Cognizant, ACNielsen and
Donnelley/D&B1 entered into an Indemnity and Joint Defense Agreement, pursuant
to which they agreed to:
o allocate potential liabilities ("IRI Liabilities") that may arise
out of or in connection with the IRI action; and
o conduct a joint defense of such action.
In particular, the Indemnity and Joint Defense Agreement provides that:
o ACNielsen will assume exclusive liability for IRI Liabilities up
to a maximum amount to be calculated at such time as such
liabilities become payable (the "ACN Maximum Amount"); and
o Donnelley/D&B1 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:
o 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 and without requiring stockholder approval; and
o payment of related fees and expenses.
For these purposes, "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:
o pay its debts as they become due; and
o 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. ("VNU"). VNU assumed ACNielsen's
liabilities under the Indemnity and Joint Defense Agreement, and VNU's business
is to be included for purposes of determining the ACN Maximum Amount.
Under the terms of the 1998 Distribution, D&B2 assumed all potential
liabilities of Donnelley/D&B1 arising from the IRI action. Under the terms of
the 2000 Distribution, we undertook to be jointly and severally liable with
Moody's for D&B2's obligations to Donnelley/D&B1 under the 1998 Distribution,
including any liabilities arising under the Indemnity and Joint Defense
Agreement. However, as agreed between each other, we and Moody's will each be
responsible for 50% of any payments to be made with respect to the IRI action
under the terms of the 1998 Distribution, including legal fees or expenses
related to the IRI action.
IMS and NMR are each jointly and severally liable for all Cognizant
liabilities under the Indemnity and Joint Defense Agreement.
We are unable to predict at this time the final outcome of the IRI action
or the financial condition of ACNielsen and VNU at the time of any such final
outcome (and hence we cannot estimate the ACN Maximum Amount and the portion of
any judgment to be paid by VNU and ACNielsen under the Indemnity and Joint
Defense Agreement). Therefore, we are unable to predict at this time whether the
ultimate resolution of this matter could materially affect our results of
operations, cash flows or financial position. No amount in respect of this
matter has been accrued in our Consolidated Financial Statements.
Hoover's - Initial Public Offering Litigation
On November 15, 2001, a putative shareholder class action lawsuit was filed
against Hoover's, certain of its current and former officers and directors, and
one of the investment banks that was an underwriter of Hoover's July 1999
initial public offering. The lawsuit was filed in the United States District
Court for the Southern District of New York and purports to be a class action
filed on behalf of purchasers of the stock of Hoover's during the period from
July 20, 1999, through December 6, 2000. Plaintiffs allege that the underwriter
defendants agreed to allocate stock in Hoover's initial public offering to
certain investors in exchange for excessive and undisclosed commissions and
agreements by those investors to make additional purchases of stock in the
aftermarket at predetermined prices. Plaintiffs allege that the Prospectus for
Hoover's initial public offering was false and misleading in violation of the
securities laws because it did not disclose these arrangements. The action seeks
damages in an unspecified amount. Hoover's intends to vigorously defend the
action. The defense of the action is being coordinated with more than 300 other
nearly identical actions filed against other companies. We are unable to predict
at this time the final outcome of this matter or whether the resolution of this
matter could materially affect our results of operations, cash flows or
financial position. No amount in respect of any potential judgment in this
matter has been accrued in our Consolidated Financial Statements.
Pension Plan Litigation
In March 2003, a lawsuit seeking class action status was filed against us
in federal court in Connecticut on behalf of 46 specified former employees, as
well as (i) current D&B employees who are participants in the Dun & Bradstreet
Retirement Account and were previously participants in its predecessor plan, The
Dun & Bradstreet Master Retirement Plan, (ii) current employees of Receivable
Management Services Corporation ("RMSC") who are participants in The Dun &
Bradstreet Retirement Account and were previously participants in its
predecessor plan, The Dun & Bradstreet Master Retirement Plan, and (iii) former
D&B or RMSC employees who received a deferred vested retirement benefit under
either the Dun & Bradstreet Retirement Account or The Dun & Bradstreet Master
Retirement Plan. The complaint estimates that the proposed class covers over
5,000 individuals.
There are three counts in the complaint: Count 1 claims a violation of
ERISA in that our sale of the Receivable Management Services business to RMSC
and the resulting termination of our employees involved constituted a prohibited
discharge of the plaintiffs and/or discrimination against the plaintiffs for the
"intentional purpose of interfering with their employment and/or attainment of
employee benefit rights which they might otherwise have attained." Count 2
claims that the plaintiffs were materially harmed by our alleged violation of
ERISA's requirements that a summary plan description reasonably apprise
participants and beneficiaries of their rights and obligations under the plans
and that, therefore, undisclosed plan provisions (in this case, the actuarial
deduction beneficiaries incur when they leave D&B before age 55) cannot be
enforced against them. Count 3 claims that the 6 3/5% interest rate used to
actuarially reduce early retirement benefits is unreasonable and, therefore,
results in a prohibited forfeiture of benefits under ERISA.
The plaintiffs seek equitable relief in the form of either reinstatement
of employment with D&B or restoration of employee benefits (including stock
options); invalidation of the plan rate of 6 3/5% used to actuarially reduce
former employees' early retirement benefits; attorneys' fees and such other
relief as the court may deem just.
We are unable to predict at this time the final outcome of this matter or
whether the resolution of this matter could materially affect our results of
operations, cash flows or financial position. No amount in repsect of this
matter has been accrued in our Consolidated Financial Statements.
Note 8 - Acquisition
On March 3, 2003, we acquired Hoover's, Inc. with cash on hand. The
results of Hoover's operations have been included in the consolidated financial
statements since that date. Hoover's provides industry and market intelligence
on public and private companies, primarily to sales, marketing and business
development professionals.
The transaction was valued at $7.00 per share in cash, for a total of
$119.4 million. In addition, we capitalized $3.3 million of transaction costs in
accordance with SFAS No. 141. The acquisition was accounted for under the
purchase method of accounting. The purchase price was allocated to the acquired
assets and liabilities on the basis of respective fair value. As a result, we
recognized goodwill and intangible assets of $66.4 million and $14.5 million,
respectively. The goodwill was assigned to our North America segment. Of the
$14.5 million of acquired intangible assets, $5.1 million was assigned to
trademarks and tradenames that are not subject to amortization and $9.4 million
was assigned to subscriber relationships and licensing agreements with useful
lives from one to five years.
We are in the process of finalizing the valuation of the acquired deferred
tax asset in connection with the acquisition; thus, the allocation of the
purchase price is subject to refinement.
The impact the acquisition would have had on our results had the
acquisition occurred at the beginning of 2003 is not material, and, as such,
pro-forma results have not been presented.
Note 9 - Segment Information
We have consolidated the management of all international activities into a
single management structure and, effective January 1, 2003, began managing our
businesses in Europe, Africa and Middle East region ("Europe") and Asia Pacific
and Latin America region ("APLA") as one segment, "International." Since
introducing our Blueprint for Growth strategy, we have significantly reduced our
investment in the APLA region through the sales of certain businesses and the
contribution of other businesses into minority investments. We have restated
prior period presentations to conform to this revised segment reporting.
Three Months Ended
March 31,
2003 2002
Operating Revenues:
North America $ 226.5 $ 239.7
International 88.2 75.0
--------- ------------
Consolidated Total $ 314.7 $ 314.7
======== ==========
Operating Income (Loss):
North America $ 80.3 $ 80.2
International 1.3 (4.0)
--------- -------------
Total Divisions 81.6 76.2
All Other (26.0) (17.2)
--------- ------------
Consolidated Total 55.6 59.0
Non-Operating Income (Expense)-- Net 3.1 (4.6)
--------- ------------
Income before Provision for Income Taxes $ 58.7 $ 54.4
======== ==========
Supplemental Geographic and Product Line Information:
Three Months Ended
March 31,
2003 2002
---- ----
Geographic Revenues:
United States $ 218.9 $ 233.3
International 95.8 81.4
-------- ----------
Total Geographic Revenue $ 314.7 $ 314.7
======= =========
Product Line Revenues:
North America:
Risk Management Solutions $ 151.7 $ 154.9
Sales & Marketing Solutions 66.9 79.0
Supply Management Solutions 5.4 5.8
E-Business Solutions 2.5 -
--------- ---------
Core Revenue 226.5 239.7
Divested Businesses - -
--------- ---------
Total North America $ 226.5 $ 239.7
-------- ---------
International:
Risk Management Solutions $ 72.4 $ 60.2
Sales & Marketing Solutions 13.7 13.2
Supply Management Solutions 2.1 1.4
--------- ---------
Core Revenue 88.2 74.8
Divested Businesses - 0.2
--------- ---------
Total International $ 88.2 $ 75.0
-------- ---------
Consolidated Operating Revenues:
Risk Management Solutions $ 224.1 $ 215.1
Sales & Marketing Solutions 80.6 92.2
Supply Management Solutions 7.5 7.2
E-Business Solutions 2.5 -
--------- --------
Core Revenue 314.7 314.5
Divested Businesses - 0.2
--------- ---------
Total Revenue $ 314.7 $314.7
======= =======
March 31, December 31,
2003 2002
Assets:
North America $ 501.8 $ 366.0
International 472.2 493.1
--------- -------------
Total Divisions 974.0 859.1
All Other (primarily U.S. pensions and taxes) 608.4 668.6
--------- -------------
Total Assets $ 1,582.4 $ 1,527.7
======== ===========
March 31, December 31,
2003 2002
Goodwill:
North America $ 118.0 $ 51.6
International 141.5 131.7
---------- ------------
Total Goodwill $ 259.5 $ 183.3
========= ===========
Note 10 - Subsequent Events
On April 9, 2003, we signed a contract to sell our High Wycombe, England,
building. We will continue to operate from a portion of the building for a
multi-year period after the sale. Upon the completion of the sale, expected in
July 2003, we expect to recognize a pre-tax loss of approximately $13 million,
and receive an amount of cash that, due to a confidentiality agreement, cannot
be disclosed until the transaction is closed.
On April 30, 2003, we acquired controlling interests in three
privately-held Italian real estate data companies: 100% interests in Italservice
Bologna S.r.l. and Datanet S.r.l. and a 51% interest in RDS S.r.l. The
transaction, valued at approximately $8 million, was funded with cash on hand.
The three companies will operate as part of Data House S.p.A., the Italian real
estate information provider that was acquired by us in the third quarter of
2002. As a result of acquiring controlling interests in these companies, our
interest in Ribes S.p.A., a service company that is a leading provider of
business information to Italian banks, increased to 35%.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Overview
The Dun & Bradstreet Corporation's ("D&B" or "We") discussion and analysis
of our financial condition and results of operations for the first quarter of
2003 are based upon D&B'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 D&B's Annual Report on Form 10-K for the year ended December 31,
2002, in which the financial statements were prepared in accordance with
generally accepted accounting principles ("GAAP") in the United States of
America.
D&B provides the information, tools and expertise to help customers
"Decide with ConfidenceTM." On January 1, 2003, we began managing our businesses
in two operating segments:
|X| U.S. and Canada, which we refer to as "North America," is our largest
segment, contributing 72% of our total revenue for the first quarter in 2003;
|X| Europe, Asia Pacific and Latin America, which we refer to as
"International," representing 28% of our total revenue for the first quarter in
2003.
In each segment, D&B's core product lines are: Risk Management Solutions, Sales
& Marketing Solutions and Supply Management Solutions.
|X| Risk Management Solutions-- our largest solution set, contributed 71% of our
total revenue for the three months ended March 31, 2003;
|X| Sales & Marketing Solutions-- our next largest solution set, contributed 26%
of our total revenue for the three months ended March 31, 2003;
|X| Supply Management Solutions-- one of our smaller solution sets, contributed
2% of our total revenue for the three months ended March 31, 2003.
In addition, beginning with our first quarter 2003, we began reporting
separately the results of our E-Business Solutions product line. E-Business
Solutions represents the results of Hoover's, Inc. since we acquired the
business on March 3, 2003. E-Business Solutions contributed 1% of our total
revenue for the three months ended March 31, 2003 and is included in our North
American segment results.
These core product lines, or customer solution sets, are discussed in
greater detail in "Item 1. Business" of our Form 10-K for the year ended
December 31, 2002.
Within our Risk Management Solutions and our Sales & Marketing Solutions,
we monitor the performance of our older, more "traditional" products and our
newer, "value-added products," because we expect the value-added products to be
primary drivers of D&B's future revenue growth.
Our traditional Risk Management Solutions generally consist of reports
derived from our database which are used primarily for making decisions about
new credit applications. An example is our Business Information Report, or BIR.
Our traditional Risk Management Solutions constituted 83% of our Risk Management
Solutions revenue and 59% of our total revenue in the first quarter of 2003. Our
value-added Risk Management Solutions generally support automated
decision-making and portfolio management through the use of scoring and
integrated software solutions. Our value-added Risk Management Solutions
constituted 17% of our Risk Management Solutions revenue and 12% of our total
revenue in the first quarter of 2003.
Our traditional Sales & Marketing Solutions generally consist of marketing
lists, labels and customized data files used by our customers in their direct
mail and direct marketing activities, and constituted 57% of our Sales &
Marketing Solutions revenue and 15% of our total revenue in the first quarter of
2003. Our value-added Sales & Marketing Solutions generally include automated
decision-making and customer information management solutions, and constituted
43% of our Sales & Marketing Solutions revenue and 11% of our total revenue in
the first quarter of 2003.
How We Evaluate Performance
For internal management purposes, we use total revenue excluding the
revenue of divested businesses, which we refer to as "core revenue," to manage
and evaluate the performance of our business, because it reflects revenue from
our ongoing operations. Core revenue includes the revenue from acquired
businesses from the date of acquisition.
We also isolate the effects of changes in foreign exchange rates on our
business because, while we take steps to manage our exposure to foreign
currency, we believe that changes in revenue growth due to exchange rate
movements are not reflective of our underlying business performance. As a
result, we monitor our core revenue growth both including and excluding the
effects of foreign exchange. We refer to these measures as revenue growth "after
the effects of foreign exchange" and "before the effects of foreign exchange,"
respectively.
We evaluate our results excluding restructuring charges (whether recurring
or non-recurring) and certain other items that we consider do not reflect our
underlying business performance (which we refer to as "non-core gains and
charges"). In the first quarter of 2003, these non-core gains and charges were
our $10.9 million restructuring charge and our $7.0 million insurance recovery
related to the World Trade Center tragedy. We had no non-core gains and charges
in the first quarter of 2002.
We believe these measures are useful to you because they reflect how we
manage our business. While we use these measures for the reasons stated above,
these measures are not prepared in accordance with GAAP and should not be
considered in isolation or as substitutes for results prepared in accordance
with GAAP. In addition, you should note that because not all companies calculate
these financial measures similarly or at all, the presentation of these measures
is not likely to be comparable to measures of other companies.
We also evaluate the profitability of our business segments before certain
operating charges. Restructuring and transition costs are managed at the
corporate level, and therefore such amounts are not included in our segment
results. Transition costs, which are period costs such as consulting fees, costs
of temporary employees, relocation costs and stay bonuses incurred to implement
the Financial Flexibility component of our strategy, are reported as Corporate
and Other expenses. Non-operating income or expenses are also managed at the
corporate level, and therefore such amounts are also excluded from segment
results.
Recently Issued Accounting Standards
See Note 2 to our consolidated financial statements for disclosure of the
impact that recently issued accounting standards will have on our financial
statements.
Results of Operations
The following discussion and analysis of our financial condition and
results of operations are based upon our consolidated financial statements, and
should be read in conjunction with those financial statements and footnotes,
which have been prepared in accordance with GAAP.
Consolidated Revenue
The following tables present our revenue by segment and product line for
the three months ended March 31, 2003 and 2002. Additionally, these tables
reconcile the non-GAAP measures of core revenue, both before and after the
effect of foreign exchange, and total revenue before the effect of foreign
exchange, to the GAAP measure of total revenue.
Growth (Decline) Less: Growth (Decline) vs.
Three Months Ended vs. Prior Year Effects of Prior Year Period
March 31, Period After Foreign Before Effects of
2003 2002 Effects of Foreign Exchange Foreign Exchange
Exchange
(Amounts in millions)
Revenues by Segment:
North America $226.5 $239.7 (6%) - (6%)
International 88.2 74.8 18% 17% 1%
------- --------
Core Revenue 314.7 314.5 - 4% (4%)
Divested Businesses - 0.2 (100%) - (100%)
--------- ---------
Total Revenue $ 314.7 $ 314.7 - 4% (4%)
====== =======
Growth (Decline)
vs. Prior Year Less: Growth (Decline)
Three Months Ended Period After Effects of vs. Prior Year
March 31, Effects of Foreign Period Before
2003 2002 Foreign Exchange Exchange Effects of Foreign Exchange
------- -------
(Amounts in millions)
Revenues by Product Line:
Risk Management Solutions $224.1 $215.1 4% 5% (1%)
Sales & Marketing Solutions 80.6 92.2 (13%) 2% (15%)
Supply Management Solutions 7.5 7.2 6% 4% 2%
E-Business Solutions 2.5 - N/A N/A N/A
--------- ---------
Core Revenue 314.7 314.5 - 4% (4%)
Divested Businesses - 0.2 (100%) - (100%)
---------- --------
Total Revenue $314.7 $314.7 - 4% (4%)
====== ======
For the three months ended March 31, 2003, total revenue was flat,
compared with the three months ended March 31, 2002. Core revenue increased $0.2
million, driven by revenue growth in International of $13.4 million, or 18%,
largely offset by a decline of $13.2 million, or 6%, in North America. First
quarter 2002 total revenue includes revenue from our Korean business, which was
divested in the quarter ended December 31, 2002.
On a product-line basis, our core revenue results in the first quarter of
2003 versus the first quarter of 2002 reflect:
|X| a $9.0 million, or 4%, growth in Risk Management Solutions, including five
percentage points of growth from favorable movements in foreign exchange rates
and two percentage points of growth due to the acquisition of Data House in the
third quarter of 2002. Traditional Risk Management Solutions grew 3%, and our
value-added Risk Management Solutions grew 12%, benefiting by six and two
percentage points of growth due to the effects of foreign exchange,
respectively. Within our traditional Risk Management Solutions, the decline
before the effect of foreign exchange was driven by continued price and volume
weakness in our largest product, the Business Information Report, reflecting the
current business enviroment and our migration of customers from the BIR to
value-added, automated solutions. In our value-added Risk Management Solutions,
our portfolio management solutions products continued to do well in the United
States, which reflects our recent investments to provide more value to our
customers in managing their credit portfolios.
|X| an $11.6 million, or 13%, decrease in Sales & Marketing Solutions, including
two percentage points of favorable movement in foreign exchange rates.
Traditional Sales & Marketing Solutions declined 25%, while our value-added
Sales & Marketing Solutions grew 12%, both reflecting two percentage points of
growth from foreign exchange. The decline in traditional Sales & Marketing
Solutions reflected our customers' reluctance to run direct mail and direct
marketing campaigns in the current environment.
|X| a $0.3 million, or 6%, increase in Supply Management Solutions on a small
base, reflecting investment spending and four percentage points of growth from
favorable movements in foreign exchange rates. This growth came from our
International segment, reflecting the ongoing benefit of the investments we made
in this area in 2002.
|X| $2.5 million of revenue from E-Business Solutions, representing the results
of Hoover's, Inc. since its acquisition on March 3, 2003.
Consolidated Operating Costs
The following table presents our consolidated operating costs and
operating income for the three months ended March 31, 2003 and 2002:
Three Months Ended
March 31,
2003 2002
---- ----
(Amounts in millions)
Operating Expenses $106.1 $108.8
Selling and Administrative Expenses 125.9 127.4
Depreciation and Amortization 16.2 19.5
Restructuring Charge
10.9 -
--------------- -----------------
Operating Costs $ 259.1 $ 255.7
=============== =================
Operating Income $ 55.6 $ 59.0
Operating expenses decreased 3% to $106.1 million in the first quarter of
2003, compared with $108.8 million in the first quarter of 2002, as headcount in
the data collection, fulfillment and technology areas decreased.
Selling and administrative expenses declined 1% to $125.9 million in the
first quarter of 2003, compared with $127.4 million in the first quarter of
2002. Administrative cost savings such as lower compensation costs achieved
through our Financial Flexibility program were largely offset by costs related
to revenue generating investments, such as additions to our sales force to
improve our marketplace coverage in Sales & Marketing Solutions.
We had net pension income of $4.2 million for the three months ended March
31, 2003, compared to net pension income of $8.5 million for the three months
ended March 31, 2002. We consider this amount to be part of our compensation
costs and, therefore, net pension income is included in operating expenses and
in selling and administrative expenses, based upon the classification of the
underlying compensation costs. Expected lower long-term returns on our pension
plan assets have resulted in the decline in net pension income compared to 2002.
Depreciation and amortization decreased 17% to $16.2 million in the first
quarter of 2003, as compared to the first quarter of 2002. The decrease in the
first quarter 2003 was largely driven by the sale of our facilities in Berkeley
Heights and Murray Hill, New Jersey in 2002 and lower capitalized spending in
the first quarter of 2003.
During the first quarter of 2003, we recognized a $10.9 million charge in
connection with the fourth phase of our Financial Flexibility program in
accordance with SFAS No. 146. The charge included $10.6 million for severance
and termination costs related to approximatley 350 employees (including a $0.5
million pension plan curtailment charge due to the fourth phase headcount
actions discussed in the following paragraph) and $0.3 million for lease
termination obligations. Under SFAS No. 146, this amount represents the
liabilities incurred during the quarter for each of these obligations. We expect
that additional restructuring charges will be incurred throughout 2003,
primarily in the second and third quarter, as additional program actions are
taken. In total, we expect to record approximately $16.4 million for all costs
related to the fourth phase of our Financial Flexibility program, including
$16.1 million for severance and termination costs related to approximately 550
employees and $0.3 million for lease termination obligations.
In accordance with SFAS No. 87 and SFAS No. 88, we are required to
recognize a one-time curtailment charge for the estimated pension expense impact
to the Dun & Bradstreet Corporation Retirement Account (the "U.S. Qualified
Plan") related to the headcount actions of the fourth phase of our Financial
Flexibility program announced on January 13, 2003. The curtailment accounting
requirement of SFAS No. 88 requires us to recognize immediately a pro-rata
portion of the unrecognized prior service cost and the cost of any special
charges related to benefit enhancements that might occur as a result of the
layoffs (e.g., full vesting). For the U.S. Qualified Plan, these items together
resulted in an immediate curtailment charge to earnings of $0.5 million in first
quarter 2003, included in the $10.9 million charge above.
As of March 31, 2003, we have terminated approximately 2,700 of the 3,250
employees affected under all four phases of the Financial Flexibility program,
including the approximately 400 employees who were transitioned to Computer
Sciences Corporation ("CSC") in connection with the outsourcing of certain
technology functions. By June 30, 2003, approximately 200 additional employees
worldwide will be terminated in connection with the third phase. By July 31,
2003, approximately 550 additional employees worldwide will have their positions
terminated in connection with the fourth phase. This will bring the total number
of employees terminated (via termination and voluntary attrition) in connection
with the four phases of the Financial Flexibility program, since its inception
in October 2000, to approximately 3,250, reflecting the elimination of 3,550
positions (including 300 open positions).
Interest Income (Expense) -- Net
The following table presents our net income and expense from interest for the
three months ended March 31, 2003 and 2002:
Three Months Ended
March 31,
2003 2002
(Amounts in millions)
Interest Income $0.8 $0.7
Interset Expense (4.5) (5.0)
----- -----
$(3.7) $(4.3)
====== =====
For the three months ended March 31, 2003, interest income increased $0.1
million, or 14%, while interest expense decreased $0.5 million, or 10% due to
lower short term interest rates.
Other Income (Expense) -- Net
The following table presents our "Other Income (Expense) -- Net" for the three
months ended March 31, 2003 and 2002:
Three Months Ended
March 31,
2003 2002
(Amounts in millions)
Miscellaneous Other Income(Expense)- Net $(0.2) $(0.3)
Insurance Recovery related to World Trade
Center Tragedy 7.0 -
----- -----
$ 6.8 $(0.3)
====== =====
For the three months ended March 31, 2003, Miscellaneous Other Income (Expense)
- - Net decreased $0.1 million, primarily due to lower bank fees. Additionally, in
the first quarter of 2003, we received a $7.0 million settlement on an
insurance claim to recover losses related tp the events of September 11, 2001.
Provision for Income Taxes
Our effective tax rate for the three months ended March 31, 2003, was
36.8%, compared with 37.5% in the first quarter of 2002. We utilize state tax
planning initiatives as well as global tax planning to lower our effective tax
rate.
Equity in Net Losses of Affiliates
In the second quarter of 2002, we exited Avantrust LLC, our joint venture
with American International Group, Inc., resulting in D&B's no longer
recognizing net losses of affiliates. In the first quarter of 2002, we recorded
$0.5 million as Equity in Net Losses of Affiliates.
Earnings per Share
We reported earnings per share, or EPS, in the three months ended March
31, 2003 and 2002, as follows:
Three Months Ended
March 31,
2003 2002
---- ----
Basic Earnings Per Share $0.50 $0.45
=========== =================
Diluted Earnings Per Share $0.48 $0.43
=========== =================
For the three months ended March 31, 2003, basic EPS increased 11%,
compared with the first quarter of 2002, reflecting an 11% increase in net
income and a 1% reduction in the weighted average number of basic shares
outstanding. Diluted EPS increased 12%, compared with the first quarter of 2002,
reflecting an 11% increase in net income and a 2% reduction in the weighted
average number of diluted shares outstanding.
Segment Results
We have consolidated the management of all international activities into a
single management structure and, effective January 1, 2003, began managing our
businesses in Europe and APLA as one segment, "International." Since introducing
our Blueprint for Growth strategy, we have significantly reduced our investment
in the APLA region through the sales of certain businesses and the contribution
of other businesses into minority investments. We have restated prior period
presentations to conform to this revised segment reporting.
North America
North America is our largest segment, representing 72% of our total
revenue for the first quarter of 2003. The following table presents our North
American product revenue for the three months ended March 31, 2003 and 2002.
This table also reconciles the non-GAAP measure of revenue before the effect of
foreign exchange to the GAAP measure of total revenue.
Growth (Decline)
vs. Prior Year Less: Growth (Decline)
Three Months Ended Period After Effects of vs. Prior Year
March 31, Effects of Foreign Period Before
2003 2002 Foreign Exchange Exchange* Effects of Foreign Exchange
------- -------
(Amounts in millions)
Revenues:
Risk Management Solutions $151.7 $ 154.9 (2%) - (2%)
Sales & Marketing Solutions 66.9 79.0 (15%) - (15%)
Supply Management Solutions 5.4 5.8 (6%) - (6%)
E-Business Solutions 2.5 - N/A - N/A
--------- ---------
Total North America Revenue $226.5 $239.7 (6%) - (6%)
====== ======
* The effect of foreign exchange on our North American revenue, which are
caused by our business in Canada, were immaterial during each of the first
quarters of 2003 and 2002.
North American revenue decreased $13.2 million, or 6%, from the first
quarter of 2002. The decline is primarily due to lower Sales & Marketing
Solutions revenue reflecting the effect of cautious customer investment behavior
in the current economic environment. The acquisition of Hoover's, Inc. on March
3, 2003, contributed $2.5 million, or one percentage point of growth.
On a product-line basis, North America's revenue results reflect:
o a $3.2 million, or 2%, decrease in Risk Management Solutions.
Traditional Risk Management solutions, which accounted for 78% of
total North American Risk Management Solutions, was down 5%. The
following trends continue to affect us:
|X| cautious spending behavior and the efforts of our customers
to streamline credit departments, which resulted in fewer actual users
of our products and pricing pressures from some of our larger
customers;
|X| a decline in new credit applications as a result of lower
level of business activity and the availability of free information
from the Internet; and
|X| the migration of our customers from the BIR and related
products to our value-added solutions.
Value-added Risk Management Solutions increased 10%, reflecting the
benefits of our investments, particularly in those products that
provide insight on new credit applications for smaller transactions,
and in our customers' portfolio management processes.
o a $12.1 million, or 15%, decrease in Sales & Marketing Solutions.
Traditional Sales & Marketing Solutions, which accounted for 52% of
total North American Sales & Marketing Solutions, decreased 31% due to
the effect of cautious customer investment behavior in the current
economic environment, resulting in their reluctance to run direct mail
and direct marketing campaigns. Value-added Sales & Marketing Solutions
increased 14%, largely driven by continued growth in comprehensive data
services.
o a $0.4 million, or 6%, decrease in Supply Management Solutions
resulting from customers' cautious investment spending behaviour.
o $2.5 million of revenue from E-Business Solutions, representing the
results of Hoover's Inc. since its acquisition on March 3, 2003.
North America's operating income in the first quarter 2003 was $80.3
million, compared to $80.2 million in the first quarter of 2002. Operating
income performance was the result of a 6% decline in revenue and higher non-cash
pension costs resulting from changes in the actuarial assumptions for the U.S.
Retirement Plan, offset by a generally lower operating cost base due to our
Financial Flexibility initiatives.
International
International represented 28% of our revenue in the first quarter of 2003.
The following table presents our International product revenue for the three
months ended March 31, 2003 and 2002. Additionally, this table reconciles the
non-GAAP measures of core revenue, both before and after the effect of foreign
exchange, and total revenue before the effect of foreign exchange, to the GAAP
measure of total revenue.
Growth (Decline)
vs. Prior Year Less: Growth (Decline)
Three Months Ended Period After Effects of vs. Prior Year
March 31, Effects of Foreign Period Before
2003 2002 Foreign Exchange Exchange Effects of Foreign Exchange
------- -------
(Amounts in millions)
Revenues:
Risk Management Solutions $ 72.4 $ 60.2 20% 17% 3%
Sales & Marketing Solutions 13.7 13.2 4% 14% (10%)
Supply Management Solutions 2.1 1.4 55% 25% 30%
---------- ---------
International Core Revenue 88.2 74.8 18% 17% 1%
Divested Businesses - 0.2 (100%) - (100%)
---------- ---------
-
Total International Revenue $ 88.2 $ 75.0 18% 17% 1%
======== =======
International revenue increased $13.2 million, or 18%, from the first
quarter of 2002. The increase in International's revenue was primarily driven by
17 percentage points of growth due to the favorable effect of foreign exchange
rate movements and six percentage points of growth due to our acquisition of
Data House in the third quarter of 2002.
On a product-line basis, International's revenue results reflect:
o a $12.2 million, or 20%, increase in Risk Management Solutions,
including 17 percentage points of growth due to favorable movements
in foreign exchange rates and eight percentage points of growth due
to the acquisition of Data House. Traditional Risk Management
Solutions increased 20%, driven by 18 percentage points of growth due
to favorable movements in foreign exchange rates and eight percentage
points of growth due to the acquisition of Data House. Within our
traditional products, we are experiencing pricing pressure and a
shift in our customers' spending from higher-priced, comprehensive
reports to lower priced, less detailed reports. Value-added Risk
Management Solutions increased 30%, including 13 percentage points of
growth due to favorable movements in foreign exchange rates.
o a $0.5 million, or 4%, increase in Sales & Marketing Solutions,
benefiting from 14 percentage points of growth due to favorable
movements in foreign exchange rates. Our Sales & Marketing Solutions
customers have cut back on their discretionary spending in the face
of challenging market conditions, and we faced increased competition
in key markets in our traditional list and labels business.
Traditional Sales & Marketing Solutions increased 7%, and our
value-added Sales & Marketing Solutions decreased 7%, driven by 14
and 13 percentage points of growth, respectively, due to the
favorable effects of foreign exchange.
o a $0.7 million, or 55%, increase in Supply Management Solutions,
including 25 percentage points of growth due to favorable movements
in foreign exchange rates, and aided by investments to enhance our
product offerings.
The following factors affecting our European business create particular
challenges to our revenue growth:
o In most European markets we do not have a market leadership position.
This makes us particularly susceptible to pricing pressures. We also
face entrenched local competitors.
o European businesses tend to manage their credit exposures through
credit insurance rather than through the credit approval process
using business information of the type provided by us.
o In many local markets in Europe, key data elements are generally
available from public-sector sources thus reducing our data
collection advantage.
o Prior to the launch of our Blueprint for Growth strategy, our
investment decisions were made at the country level and not in a
coordinated fashion across the European marketplace. While we have
made significant investments to mitigate the situation, we are still
face with uneven data quality in some local markets.
International's operating income was $1.3 million in first quarter of 2003,
compared with an operating loss of $4.0 million in first quarter of 2002,
primarily due to an 18% increase in revenue as well as a lower cost base
associated with our Financial Flexibility program. Specifically, cost
improvements were achieved in the technology, administrative and data collection
areas.
Liquidity and Financial Position
At March 31, 2003, cash and cash equivalents totaled $149.3 million, a
decrease from $191.9 million at December 31, 2002. This $42.6 million decrease
primarily reflects $82.8 million used for the acquisition of Hoover's (net of
cash acquired), $13.2 million used to repurchase shares, $7.4 million used to
purchase marketable securities and $5.9 million of investments in capital
expenditures and capitalized software, partially offset by $60.7 million of cash
provided from operations and $4.9 million of net proceeds received in connection
with our stock incentive plans.
We believe that cash flows generated from our operations and supplemented
as needed with readily available financing in the commercial paper markets are
sufficient to meet our short-term and long-term needs, including the cash cost
of our restructuring charges, transition costs, lease committments and tax and
legal matters. We access the commercial paper market from time to time to fund
working capital needs and share repurchases. Such borrowings have been supported
by our bank credit facilities.
Cash Provided by Operating Activities
Net cash provided by operating activities in the three months ended March
31, 2003, was $60.7 million, while operating activities in the same period of
2002 provided net cash of $7.5 million. This increase of $53.2 million was
primarily due to the $51.0 million improvement in our accounts receivables due
to collections improvements across our entire portfolio from prior year levels.
The remaining difference is primarily due to the receipt of $7.0 million in the
first quarter of 2003 in settlement of our insurance claim to recover losses
related to the events of September 11, 2001. During the three months ended March
31, 2003, D&B made payments of $8.6 million related to the restructuring actions
associated with our Financial Flexibility program, compared to payments of $6.5
million in the same period of 2002.
Cash Used in Investing Activities
Net cash used in investing activities totaled $96.3 million in first
quarter 2003, compared with net cash used in investing activities of $9.1
million in first quarter 2002. This change primarily was related to the payments
of $82.8 million (net of cash acquired) for the acquisition of Hoover's in the
first quarter of 2003. (We also received $11.7 million of short term marketable
securities as part of the acquisition.) See Future Liquidity - Sources and Uses
of Funds, below, regarding an additional payment we made in connection with this
acquisition. During the first quarter of 2003, we also purchased $7.4 million of
marketable securities.
Cash Used in Financing Activities
Net cash used in financing activities was $8.1 million in the first quarter
of 2003, compared with net cash used in financing activities of $53.5 million in
the same period of 2002.
During the first quarter of 2003, we repurchased 314,500 shares for $10.8
million in connection with the previously-announced $100 million, two-year share
repurchase program authorized by our board of directors in October 2002. As of
March 31, 2003, there was $89.2 million remaining under this program. In
addition, in the first quarter of 2003, we repurchased 70,000 shares of common
stock for $2.4 million to mitigate the dilutive effect of shares issued under
the stock incentive plans and in connection with our Employee Stock Purchase
Plan. Net proceeds from these stock plans totaled $4.9 million in the quarter.
In January 2002, we acquired 2.5 million shares in a privately-negotiated
block trade for $85.1 million. In the first quarter of 2002, we also repurchased
244,800 of our shares for $10.1 million to mitigate the dilutive effect of
shares issued under stock incentive plans and in connection with our Employee
Stock Purchase Plan. Net proceeds from these plans totaled $5.9 million in the
quarter.
Our share repurchase activities were funded with cash on hand and/or
short-term commercial paper borrowings. We had no commercial paper outstanding
as of March 31, 2003. At March 31, 2002, we had $35.6 million of commercial
paper outstanding, which we borrowed during the quarter.
Future Liquidity - Sources and Uses of Funds
Acquisition of Hoover's
On March 3, 2003, we completed the acquisition of Hoover's. Certain
shareholders of Hoover's, representing approximately 1.4 million of the shares
outstanding, had previously notified Hoover's that they may seek to exercise
their appraisal rights with respect to their shareholdings. In an appraisal
proceeding, a Delaware court would determine the "fair value" of the Hoover's
shares and would then require us to pay that amount as the purchase price for
the shares subject to the appraisal proceeding. During the second quarter of
2003, we received notifications that these shareholders had withdrawn their
requests for appraisal. Accordingly, during the second quarter of 2003 we made
an additional payment of $9.8 million for the acquisition. This payment and the
amounts paid during the first quarter of 2003 will bring the total purchase
price of the acquisition to $119.4 million, or $80.9 million, net of cash and
short term investments acquired.
The Sale of Our European Headquarters Building in 2003
On April 9, 2003, we signed a contract to sell our High Wycombe, England,
building. We will continue to operate from a portion of the building for a
multi-year period after the sale. Upon the completion of the sale, expected in
July 2003, we expect to recognize a pre-tax loss of approximately $13 million,
and receive an amount of cash that, due to a confidentiality agreement, cannot
be disclosed until the transaction is closed.
Acquisition of Three Italian Real Estate Information Companies
On April 30, 2003, we acquired controlling interests in three
privately-held Italian real estate data companies: 100% interests in Italservice
Bologna S.r.l. and Datanet S.r.l. and a 51% interest in RDS S.r.l. The
transaction, valued at approximately $8 million, was funded with cash on hand.
The three companies will operate as part of Data House S.p.A., the Italian real
estate information provider that was acquired by us in the third quarter of
2002. As a result of acquiring controlling interests in these companies, our
interest in Ribes S.p.A., a service company that is a leading provider of
business information to Italian banks, increased to 35%.
Potential Payments in Settlement of Tax and Legal Matters
We and our predecessors are involved in certain tax and legal
proceedings, claims and litigation arising in the ordinary course of business.
These matters are at various states or resolution, but could ultimately result
in cash payments in the amounts described in Note 7 - Contingencies and Other
Uncertaintities above. Of the matters currently pending, we believe it is
possible that a payment to the IRS of up to $62 million in connection with the
Royalty Expense Deductions taken in 1994 - 1996, may be made during 2003.
Forward-Looking Statements
We may from time to time make written or oral forward-looking statements,
including statements contained in filings with the Securities and Exchange
Commission, in reports to shareholders and in press releases and investor
Webcasts. You can identify these forward-looking statements by use of words like
"anticipates," "aspirations," "believes," "continues," "estimates," "expects,"
"goals," "guidance," "intends," "plans," "projects," "strategy," "targets,"
"will" and other words of similar meaning. You can also identify them by the
fact that they do not relate strictly to historical or current facts.
We cannot guarantee that any forward-looking statement will be realized,
although we believe we have been prudent in our plans and assumptions.
Achievement of future results is subject to risks, uncertainties and inaccurate
assumptions. Should known or unknown risks or uncertainties materialize, or
should underlying assumptions prove inaccurate, actual results could vary
materially from those anticipated, estimated or projected. Investors should bear
this in mind as they consider forward-looking statements and whether to invest
in, or remain invested in, our securities. In connection with the "safe harbor"
provisions of the Private Securities Litigation Reform Act of 1995, we are
identifying in the following paragraphs important factors that, individually or
in the aggregate, could cause actual results to differ materially from those
contained in any forward-looking statements made by us; any such statement is
qualified by reference to the following cautionary statements.
Demand for our products is subject to intense competition, changes in
customer preferences and economic conditions. Our results are dependent upon our
continued ability to:
o develop new products;
o invest in our database and maintain our reputation for providing reliable
data;
o develop and maintain a successful Web-based business model;
o reallocate expense to achieve growth through our Financial Flexibility
program;
o manage employee satisfaction and maintain our global expertise as we implement
our Financial Flexibility program; and
o protect against damage or interruptions affecting our database or our data
centers.
We are also subject to the effects of global economies, exchange rate
fluctuations and U.S. and foreign legislative or regulatory requirements. Our
results are also dependent upon the availability of data for our database.
Developments in any of these areas could cause our results to differ materially
from results that have been or may be projected.
We elaborate on the above list of important factors throughout this document
and in our other filings with the SEC, particularly in the section entitled
"Trends, Risks and Uncertainties" in "Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations" in our Form 10-K for
the year ended December 31, 2002. You should understand that it is not possible
to predict or identify all risk factors. Consequently, you should not consider
the above list of important factors or the trends, risks and uncertainties
discussed in our Form 10-K to be a complete discussion of all our potential
trends, risks and uncertainties. We do not undertake to update any
forward-looking statement we may make from time to time.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
D&B'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 2002
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 March 31, 2003, no material change had occurred in our market risks, compared
with the disclosure in the Form 10-K for the year ending December 31, 2002.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Internal Controls
Within the 90 days prior to the filing date of this Quarterly Report on Form
10-Q, we evaluated the effectiveness of the design and operation of our
disclosure controls and procedures ("Disclosure Controls"). This evaluation
("Controls Evaluation") was done under the supervision and with the
participation of management, including our Chairman and Chief Executive Officer
("CEO") and Chief Financial Officer ("CFO").
Disclosure Controls are controls and other procedures that are designed to
ensure that information required to be disclosed by us in the reports that we
file or submit under the Securities Exchange Act of 1934 is recorded, processed,
summarized and reported, within the time periods specified in the SEC's rules
and forms. Disclosure controls and procedures include, without limitation,
controls and procedures designed to ensure that information required to be
disclosed by us in the reports that we file under the Exchange Act is
accumulated and communicated to our management, including our CEO and CFO, as
appropriate to allow timely decisions regarding required disclosure.
Limitations on the Effectiveness of Controls
Our management, including our CEO and CFO, does not expect that our
Disclosure Controls or our internal controls and procedures for financial
reporting ("Internal Controls") will prevent all error and all fraud. A control
system, no matter how well conceived and operated, can provide only reasonable,
but not absolute, assurance that the objectives of a control system are met.
Further, any control system reflects limitations on resources, and the benefits
of a control system must be considered relative to its costs. Because of the
inherent limitations in all control systems, no evaluation of controls can
provide absolute assurance that all control issues and instances of fraud, if
any, within D&B have been detected. These inherent limitations include the
realities that judgments in decision-making can be faulty and that breakdowns
can occur because of simple error or mistake. Additionally, controls can be
circumvented by the individual acts of some persons, by collusion of two or more
people, or by management override of a control. As design of a control system is
also based upon certain assumptions about the likelihood of future events, there
can be no assurance that any design will succeed in achieving its stated goals
under all potential future conditions; over time, controls may become inadequate
because of changes in conditions, or the degree of compliance with the policies
or procedures may deteriorate. Because of the inherent limitations in a
cost-effective control system, misstatements due to error or fraud may occur and
may not be detected.
Conclusions
Based upon the Controls Evaluation, our CEO and CFO have concluded that,
subject to the limitations noted above, the Disclosure Controls are effective to
timely alert management to material information relating to D&B during the
period when our periodic reports are being prepared.
In accordance with SEC requirements, our CEO and CFO note that, since the
date of the Controls Evaluation to the filing date of this Quarterly Report,
there have been no significant changes in Internal Controls or in other factors
that could significantly affect Internal 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 14 in Part I, Item 1, of this Form 10-Q.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit 99 - Certification of Chief Executive Officer and Chief
Financial Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K:
During the first quarter of our fiscal year ending December 31,
2003, we filed or furnished two reports on Form 8-K. We filed or furnished
a Current Report on Form 8-K on February 6, 2003, covering Item 5 (Other
Events), Item 7 (Financial Statements, Pro Forma Financial Information and
Exhibits) and Item 9 (Regulation FD Disclosure). We furnished a Current
Report on Form 8-K on March 19, 2003, covering Item 9 (Regulation FD
Disclosure).
Since the end of the first quarter of our fiscal year ending
December 31, 2003, we have furnished two reports on Form 8-K. We furnished
a Current Report on Form 8-K on April 9, 2003 and April 22, 2003, each
covering Item 12 (Results of Operations and Financial Condition).
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: May 14, 2003 By: /s/ SARA MATHEW
-----------------------------------------------------
Sara Mathew
Senior Vice President and Chief Financial Officer
Date: May 14, 2003 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;
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 registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and 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
registrant'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 registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the auditors and the audit committee of
the registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
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 registrant'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: May 14, 2003 By: /s/ ALLAN Z. LOREN
-----------------------------------------------------
Allan Z. Loren
Chairman and Chief Executive Officer
Certification of the Chief Financial Officer
I, Sara Mathew, certify that:
1. I have reviewed this quarterly report on Form 10-Q of The Dun and
Bradstreet Corporation;
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 registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and 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
registrant'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 registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the auditors and the audit committee of
the registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
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 registrant'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: May 14, 2003 By: /s/ SARA MATHEW
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Sara Mathew
Senior Vice President and Chief Financial Officer