SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------
FORM 10-Q
(Mark one)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2003
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
--------------------- ------------------
Commission file number 1-15967
The Dun & Bradstreet Corporation
(Exact name of registrant as specified in its charter)
Delaware 22-3725387
(State of incorporation) (I.R.S. Employer Identification No.)
103 JFK Parkway, Short Hills, NJ 07078
(Address of principal executive offices) (ZIP Code)
Registrant's telephone number, including area code: (973) 921-5500
Indicate by check mark whether the Registrant: (1) has filed all reports
required by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months ( or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
Indicate by check mark whether the Registrant is an 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 September 30, 2003
par value $0.01 per share 72,705,797
THE DUN & BRADSTREET CORPORATION
INDEX TO FORM 10-Q
PART I. FINANCIAL INFORMATION PAGE
Item 1. Financial Statements
Consolidated Statements of Operations (Unaudited)
Three and Nine Months Ended September 30, 2003 and 2002 1
Consolidated Balance Sheets
September 30, 2003 (Unaudited) and December 31, 2002 2
Consolidated Statements of Cash Flows (Unaudited)
Nine Months Ended September 30, 2003 and 2002 3
Notes to Consolidated Financial Statements (Unaudited) 4-17
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 17-34
Item 3. Quantitative and Qualitative Disclosures about Market Risk 34
Item 4. Controls and Procedures 34-35
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 36
Item 6. Exhibits and Reports on Form 8-K 36
SIGNATURES 37
Exhibits 38-43
The Dun & Bradstreet Corporation and Subsidiaries
Consolidated Statements of Operations (Unaudited)
Amounts in millions, except per share data
Three Months Ended Nine Months Ended
September 30, September 30,
2003 2002 2003 2002
----- ----- ---- ----
Revenue $ 332.3 $ 298.9 $ 982.0 $ 919.5
Operating Expenses 117.8 100.3 325.7 311.3
Selling and Administrative Expenses 144.2 118.9 421.6 368.4
Depreciation and Amortization 14.6 20.9 46.5 60.3
Restructuring Charge 1.6 - 17.4 30.9
--------- --------- -------- --------
Operating Costs 278.2 240.1 811.2 770.9
--------- --------- -------- --------
Operating Income 54.1 58.8 170.8 148.6
--------- --------- -------- --------
Interest Income 1.1 0.7 2.7 2.0
Interest Expense (4.8) (4.9) (14.0) (14.8)
Other Income (Expense) - Net (3.2) 1.8 2.9 (2.0)
--------- --------- -------- --------
Non-Operating Expense - Net (6.9) (2.4) (8.4) (14.8)
--------- --------- -------- --------
Income Before Provision for Income Taxes 47.2 56.4 162.4 133.8
Provision for Income Taxes 18.3 21.7 61.3 53.0
Equity in Net Losses of Affiliates (0.1) - (0.1) (1.7)
--------- --------- -------- --------
Net Income $ 28.8 $ 34.7 $ 101.0 $ 79.1
========== ========== ======== ========
Basic Earnings per Share of Common Stock $ 0.39 $ 0.47 $ 1.36 $ 1.06
========== ========== ======== ========
Diluted Earnings per Share of Common Stock $ 0.38 $ 0.45 $ 1.32 $ 1.03
========== ========== ======== ========
Weighted Average Number of Shares Outstanding - Basic 73,534,000 74,295,000 74,118,000 74,559,000
Weighted Average Number of Shares Outstanding - Diluted 76,152,000 76,540,000 76,428,000 77,033,000
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)
September 30, December 31,
2003 2002
----- -----
Assets
Current Assets
Cash and Cash Equivalents $ 199.7 $ 191.9
Accounts Receivable, Net of Allowance of $20.1 at September 30, 2003 and $23.0
at December 31, 2002 277.4 334.9
Other Receivables 38.7 48.3
Assets Held for Sale 36.1 -
Other Current Assets 29.0 39.1
----- -----
Total Current Assets 580.9 614.2
----- -----
Non-Current Assets
Property, Plant and Equipment, Net 55.0 149.7
Prepaid Pension Costs 403.4 367.3
Computer Software, Net 52.3 69.5
Goodwill, Net 245.4 183.3
Deferred Income Taxes 97.2 81.9
Other Non-Current Assets 72.2 61.8
----- -----
Total Non-Current Assets 925.5 913.5
----- -----
Total Assets $ 1,506.4 $ 1,527.7
========== ==========
Current Liabilities
Accounts and Notes Payable $ 40.7 $ 47.5
Accrued Payroll 87.4 102.2
Accrued Income Tax 49.3 49.3
Liabilities Held for Sale 10.8 -
Other Accrued and Current Liabilities 128.0 152.0
Deferred Revenue 369.5 367.1
----- -----
Total Current Liabilities 685.7 718.1
----- -----
Pension and Postretirement Benefits 448.2 441.5
Long Term Debt 299.9 299.9
Other Non-Current Liabilities 83.3 87.0
Contingencies (Note 7)
Shareholders' 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 (3.8) (0.6)
Capital Surplus 205.2 218.7
Retained Earnings 385.0 284.0
Treasury Stock, at cost, 9,239,723 and 7,586,604 shares at September 30, 2003
and December 31, 2002, respectively (316.7) (240.3)
Cumulative Translation Adjustment (194.0) (194.2)
Minimum Pension Liability Adjustment (87.2) (87.2)
----- -----
Total Shareholders' Equity (10.7) (18.8)
----- -----
Total Liabilities and Shareholders' Equity $ 1,506.4 $ 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
Nine Months Ended
September 30,
2003 2002
---- ----
Cash Flows from Operating Activities:
Net Income $ 101.0 $ 79.1
Reconciliation of Net Income to Net Cash Provided by Operating Activities:
Depreciation and Amortization 46.5 60.3
Loss from Sale of Building 13.8 -
Loss (Gain) from Sales of Businesses 2.1 (2.6)
Equity Losses in Excess of Dividends Received from Affiliates 0.1 1.7
Restructuring Charge, Net and Other Asset Impairments 17.4 30.9
Restructuring Payments (23.8) (25.2)
Deferred Income Taxes (6.0) (14.6)
Accrued Income Taxes, Net 24.1 48.1
Changes in Current Assets and Liabilities:
Decrease in Accounts Receivable 59.2 51.7
Net (Increase) Decrease in Other Current Assets (1.9) 3.1
Net Increase in Deferred Revenue (6.8) (7.7)
Net Decrease in Accounts Payable (7.8) (9.2)
Net Decrease in Accrued Liabilities (36.1) (46.0)
Net Decrease in Other Current Liabilities (9.7) (9.8)
Changes in Non-Current Assets and Liabilities:
Increase in Other Long Term Assets (31.8) (37.5)
Net Increase in Long Term Liabilities 7.6 4.3
Other 8.4 7.1
----- -----
Net Cash Provided by Operating Activities 156.3 133.7
----- -----
Cash Flows from Investing Activities:
Proceeds from Sales of Real Estate 80.2 21.5
Net Investments in Marketable Securities 3.7 -
Proceeds from Sales of Businesses 3.3 1.3
Payments for Acquisitions of Businesses, Net of Cash Acquired (98.0) (21.2)
Capital Expenditures (7.0) (8.2)
Additions to Computer Software and Other Intangibles (12.8) (25.7)
Investments in Unconsolidated Affiliates (1.9) (0.9)
Other (16.8) (8.4)
----- -----
Net Cash Used in Investing Activities (49.3) (41.6)
----- -----
Cash Flows from Financing Activities:
Payments for Purchases of Treasury Shares (121.3) (114.2)
Net Proceeds from Stock Plans 18.3 10.0
Other 1.4 0.8
----- -----
Net Cash Used in Financing Activities (101.6) (103.4)
----- -----
Effect of Exchange Rate Changes on Cash and Cash Equivalents 2.4 2.0
----- -----
Net (Decrease) Increase in Cash and Cash Equivalents 7.8 (9.3)
Cash and Cash Equivalents, Beginning of Period 191.9 145.3
----- -----
Cash and Cash Equivalents, End of Period $ 199.7 $ 136.0
============ ============
Supplemental Disclosure of Cash Flow Information:
Cash Paid
Income Taxes, Net of Refunds $ 35.2 $ 22.2
Interest $ 17.2 $ 18.3
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. They should be read in
conjunction with the consolidated financial statements and related notes, which
appear in 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 do not include all disclosures required by accounting principles
generally accepted in the United States for annual financial statements and are
not necessarily indicative of results for the full year or any subsequent
period. In the opinion of our management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation of 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 (see Note 10).
Note 2 - Recent Accounting Pronouncements
In December 2002, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 148, "Accounting
for Stock-Based Compensation - Transition and Disclosure." SFAS 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 require companies to account for
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 quarterly disclosure of the effects of the fair value method of
accounting for stock-based employee compensation on reported net income and
earnings per share. In the table below, we disclose this effect.
Three Months Nine Months
Ended September 30, Ended September 30,
2003 2002 2003 2002
---- ---- ----- ----
Reported Net Income $ 28.8 $ 34.7 $ 101.0 $ 79.1
Add: Stock compensation cost under the intrinsic
method, included in net income, net of tax
benefits 0.4 0.2 1.2 0.5
Deduct: Total stock compensation cost under
fair-value method for all awards, net of tax
benefits (2.6) (2.1) (8.4) (6.0)
---- ---- ---- ----
Pro forma Net Income $ 26.6 $ 32.8 $ 93.8 $ 73.6
======== ======== ========= ========
Basic EPS:
As reported $ 0.39 $ 0.47 $ 1.36 $ 1.06
========= ========= ========== =========
Pro forma $ 0.36 $ 0.44 $ 1.27 $ 0.99
========= ========= ========== =========
Diluted EPS:
As reported $ 0.38 $ 0.45 $ 1.32 $ 1.03
========= ========= ========== =========
Pro forma $ 0.35 $ 0.43 $ 1.23 $ 0.95
========= ========= ========== =========
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133
on Derivative Instruments and Hedging Activities." SFAS No. 149 clarifies the
accounting and reporting for derivative instruments, including certain
derivative instruments embedded in other contracts and for hedging activities
under SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities." In particular, SFAS No. 149 clarifies under what circumstances a
contract with an initial net investment meets the characteristic of a derivative
as described in SFAS No. 133. SFAS No. 149 is generally effective for derivative
instruments entered into or modified after June 30, 2003 and for hedging
relationships designated after June 30, 2003. We have reviewed SFAS No. 149 and
determined that it will not have any material impact on our consolidated
financial statements.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity." SFAS
No. 150 requires certain financial instruments that have both equity and
liability characteristics to be classified as a liability on the balance sheet.
SFAS No. 150 is effective for financial instruments entered into or modified
after May 31, 2003, and otherwise is effective at the beginning of the first
interim period beginning after June 15, 2003. We have reviewed SFAS No. 150 and
determined that it will not have any material impact on our consolidated
financial statements.
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 all guarantees issued or
modified after December 31, 2002. Guarantees issued or modified during the nine
months ended September 30, 2003 did not have a material impact on our
consolidated financial statements.
With respect to FIN No. 45, D&B is potentially liable for certain tax
matters and a legal proceeding commenced by Information Resources, Inc. Please
see Note 7 of our consolidated financial statements for a discussion of our
obligations with respect to these matters.
Additionally, in the normal course of business, D&B indemnifies other
parties, including customers, lessors and parties to other transactions with
D&B, with respect to certain matters. D&B has agreed to hold the other party
harmless against losses arising from a breach of representations or covenants,
or out of other claims made against certain parties. These agreements may limit
the time within which an indemnification claim can be made and the amount of the
claim. D&B has also entered into indemnity obligations with its officers and
directors of the company. Additionally, in certain circumstances, D&B issues
guarantee letters on behalf of our wholly-owned subsidiaries for specific
situations. It is not possible to determine the maximum potential amount of
future payments under these indemnification agreements due to the limited
history of prior indemnification claims and the unique facts and circumstances
involved in each particular agreement. Historically, payments made by D&B under
these agreements have not had a material impact on our consolidated financial
statements.
In January 2003, the FASB issued FASB Interpretation No. 46,
"Consolidation of Variable Interest Entities" ("FIN No. 46"), which amended
Accounting Research Bulletin No. 51, "Consolidated Financial Statements," and
established standards for determining the circumstances under which a variable
interest entity ("VIE") should be consolidated with its primary beneficiary. FIN
No. 46 also requires disclosure about VIEs that we are not required to
consolidate but in which we have a significant variable interest. The
consolidation requirements of FIN No. 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 December 31, 2003. We have
reviewed FIN No. 46 to determine its impact on future periods, and do not expect
any material accounting or disclosure requirements under this interpretation.
In November 2002, the 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 a
description of multiple-element arrangements and disclosure of the accounting
policy for recognition of revenue from these arrangements. The guidance of EITF
No. 00-21 is effective for revenue arrangements entered into in fiscal periods
beginning after June 15, 2003. We have reviewed our revenue recognition
practices with respect to multiple deliverables. We have determined that EITF
No. 00-21 will not have any material impact on our current revenue recognition
practices and will not have any material impact on our consolidated financial
statements.
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 third quarter of 2003, we recognized a $1.6 million
restructuring charge for severance and termination costs in connection with the
fourth phase of our Financial Flexibility program. Through the first nine months
of 2003, we have recorded $17.4 million of restructuring charges in connection
with the fourth phase of our Financial Flexibility program. This completes the
charges for the fourth phase of our Financial Flexibility program. The
year-to-date charge includes $17.1 million for severance and termination costs
related to approximately 500 employees (including a $0.5 million pension plan
curtailment charge due to the fourth phase as discussed in the following
paragraph) and $0.3 million for lease termination obligations. As of September
30, 2003, all of the approximately 500 employees have been terminated under the
fourth phase of our financial flexibility program.
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 the
first quarter 2003, which is included in the $17.1 million severance and
termination 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 loss on asset disposals and the write-off of assets that were abandoned
(including $9.7 million from the outsourcing 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 determined as the fair value for the assets. This
resulted in a $9.7 million impairment loss.
As of September 30, 2003, we have terminated approximately 3,200
employees under all four phases of the Financial Flexibility program, including
the approximately 400 employees who were transitioned to CSC, as mentioned
above. 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
3,200, reflecting the elimination of 3,500 positions (including 300 open
positions).
The following table sets forth, in accordance with SFAS No. 146,
"Accounting for Costs Associated with Exit or Disposal Acitivities," the
restructuring reserves and utilization to date related to the fourth phase of
our Financial Flexibility program.
Severance Lease
and Pension Termination
Termination Curtailment Obligations Total
2003 (Phase IV) Restructuring Charges -
Total Charge Incurred during 2003 $ 16.6 $ 0.5 $ 0.3 $ 17.4
========= ======= ======= =======
Charge Taken during First Quarter 2003 $ 10.1 $ 0.5 $ 0.3 $ 10.9
Payments/Curtailment during First Quarter 2003 (2.6) (0.5) - (3.1)
--------- ------- ------- -------
Balance Remaining as of March 31, 2003 $ 7.5 $ - $ 0.3 $ 7.8
========= ======= ======= =======
Charge Taken during Second Quarter 2003 $ 4.9 $ - $ - $ 4.9
Payments during Second Quarter 2003 (4.5) - (0.1) (4.6)
--------- ------- ------- -------
Balance Remaining as of June 30, 2003 $ 7.9 $ - $ 0.2 $ 8.1
========= ======= ======= =======
Charge Taken during Third Quarter 2003 $ 1.6 $ - $ - $ 1.6
Payments during Third Quarter 2003 (4.0) - - (4.0)
--------- ------- ------- -------
Balance Remaining as of September 30, 2003 $ 5.5 $ - $ 0.2 $ 5.7
========= ======= ======= =======
The following table sets forth, under the requirements of Emerging Issues
Task Force Issue No. 94-3, "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity," the reserves and
utilization to date related to the third phase of our Financial Flexibility
program.
2002
Original Payments/ Balance at 2003 Balance at
Charge Asset Write-offs 12/31/2002 Payments 9/30/2003
2002 (Phase III)
Restructuring Charge for:
Severance and Termination $ 18.6 $ (7.3) $ 11.3 $ (9.5) $ 1.8
Asset Write-Offs 10.6 (10.6) - - -
Lease Termination Obligations 1.7 (0.2) 1.5 (0.1) 1.4
--- ---- --- ---- ---
$ 30.9 $ (18.1) $ 12.8 $ (9.6) $ 3.2
====== ======= ======= ======= =====
We completed all the actions contemplated under the first phase of our
Financial Flexibility program by the end of 2001 and completed the actions under
the second phase by June 30, 2002. There have not been any significant changes
to our original Financial Flexibility programs.
Note 4 - Notes Payable and Indebtedness
D&B's $100 million 364-day revolving credit facility due to expire in
September 2003, was renewed and the new $100 million facility expires in
September 2004. D&B also has an additional $175 million term revolving credit
facility expiring in September 2005. Under these facilities, D&B has the ability
to borrow at prevailing short-term interest rates. These facilities also support
D&B's commercial paper borrowings up to $275 million. D&B has not drawn on these
facilities since their inception and has no borrowings outstanding under these
facilities at September 30, 2003. D&B has not borrowed under its commercial
paper program in 2003. We believe that cash flows generated from its operations,
supplemented as needed with its readily available financing arrangements, are
sufficient to meet its short-term and long-term needs.
In addition, D&B has notes of $300 million in principal, which have a
five-year term maturing in March 2006 and bear interest at a fixed annual rate
of 6.625% payable semiannually.
Our borrowings at September 30, 2003 and December 31, 2002, including
interest rate swaps designated as hedges, are summarized below:
September 30, 2003 December 31, 2002
Liab (Asset) Liab (Asset)
Notes Payable - Current $ - $ 0.1
------- --------
Fair Value Of Long-Term Fixed Rate Notes $ 305.0 $ 305.7
Fair Value Of Interest-Rate Swaps (5.2) (6.0)
Other 0.1 0.2
------- --------
Long Term Debt $ 299.9 $ 299.9
======= ========
Note 5 -Reconciliation of Weighted Average Shares
Three Months Ended Nine Months Ended
September 30, September 30,
2003 2002 2003 2002
---- ---- ---- ----
(Shares data in thousands) (Shares data in thousands)
Weighted average number of shares-basic 73,534 74,295 74,118 74,559
Dilutive effect of shares issuable under stock options,
restricted stock and performance share plans 2,478 2,188 2,167 2,412
Adjustment of shares applicable to stock options exercised
during the period and performance share plans 140 57 143 62
--- -- --- --
Weighted average number of shares-diluted 76,152 76,540 76,428 77,033
====== ====== ====== ======
During the third quarter of 2003 and 2002, we repurchased 666,689 and
85,400 shares of common stock for $27.9 million and $3.0 million, respectively,
to mitigate the dilutive effect of the shares issued under our stock incentive
plans and Employee Stock Purchase Plan. Additionally, during the third quarter
of 2003, we repurchased 948,311 shares in connection with a previously announced
$100 million share repurchase program for $39.8 million. For the nine months
ended September 30, 2003, we repurchased 1,756,611 shares in connection with the
$100 million share repurchase program for $70.1 million. For the nine months
ended September 30, 2003 and 2002, we repurchased 1,267,689 and 756,100 for
$51.2 million and $29.1 million, respectively, to mitigate the dilutive effect
of the shares under our stock incentive plans and Employee Stock Purchase Plan.
During the first quarter of 2002, we repurchased 2.5 million shares at the
market price of $85.1 million, in a privately negotiated block trade.
Options to purchase 163,230 and 1,600,974 shares of common stock at
September 30, 2003 and 2002, respectively, were not included in the computation
of diluted earnings per share because the options' exercise prices were greater
than the current 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 months and nine months ended
September 30, 2003 and 2002, which includes net income and other gains and
losses that affect shareholders' equity, was as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
2003 2002 2003 2002
------ ------ ------- ------
Net Income $ 28.8 $ 34.7 $ 101.0 $ 79.1
Other Comprehensive Income (Loss)
Foreign Currency Translation Adjustment (6.0) 3.9 0.2 6.0
Unrealized Gains (Losses) on Investments 0.1 - - (0.2)
------ ------ ------- ------
Total Comprehensive Income $ 22.9 $ 38.6 $101.2 $ 84.9
====== ====== ====== ======
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 probability of the 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, that
$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.
Royalty Expense Deductions -- 1993-1996. In the second quarter of 2003, we
received on behalf of Donnelley/D&B1 an IRS agent's examination report with
respect to a partnership transaction entered into in 1993.
Specifically, the IRS is disallowing certain royalty expense deductions
claimed by Donnelley/D&B1 on its 1993-1996 tax returns. We estimate that the
disallowance of the 1993 and 1994 royalty expense deductions would result in a
loss to us of $5 million in pending tax refunds. We also estimate that the
disallowance of the 1995 and 1996 royalty expense deductions would require
payment from us of up to $43 million (tax, interest and penalties, net of
associated tax benefits).
In addition, and also in the second quarter of 2003, we received on
behalf of the partnership associated with the above transaction an IRS agent's
examination report challenging the tax treatment of certain royalty payments
received by the partnership in which Donnelley/D&B1 was a partner. The IRS is
seeking to reallocate certain partnership income to Donnelley/D&B1. 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 believe that this
position is inconsistent with the IRS' position with respect to the same royalty
expense deductions described above.
We have filed protests relating to these proposed adjustments with the
IRS Office of Appeals. The parties will attempt to resolve these matters at the
Appeals phase before proceeding to litigation, if necessary. If the IRS were to
prevail in its position, we would share responsibility for the matter with
Moody's, IMS and NMR, as disclosed above. If 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.
Amortization Expense Deductions -- 1997-2002. The IRS has challenged the expense
deductions 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 issue an assessment. If the IRS were
to prevail or we were to challenge the assessment in U.S. District Court, we
estimate that our cash payment to the IRS with respect to deductions claimed to
date could be up to $49.8 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 $2.1 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 have a reserve of $100 million recorded in the
consolidated financial statements, which we believe is adequate for our share of
the potential liabilities 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. Discovery in the case
is continuing and a trial date has been scheduled for September 2004.
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 then current and former officers and
directors (the "Individual Defendants"), and one of the investment banks that
was an underwriter of Hoover's July 1999 initial public offering ("IPO"). The
lawsuit was filed in the United States District Court for the Southern District
of New York and purports to be a class action filed on behalf of purchasers of
the stock of Hoover's during the period from July 20, 1999, through December 6,
2000. An Amended Complaint, which is now the operative complaint, was filed on
April 19, 2002. Plaintiffs allege that the underwriter defendant agreed to
allocate stock in Hoover's IPO to certain investors in exchange for excessive
and undisclosed commissions and agreements by those investors to make additional
purchases of stock in the aftermarket at predetermined prices above the IPO
price. Plaintiffs allege that the Prospectus for Hoover's IPO 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. The defense of
the action is being coordinated with more than 300 other nearly identical
actions filed against other companies. On July 15, 2002, Hoover's moved to
dismiss all claims against it and the Individual Defendants. On October 9, 2002,
the Court dismissed the Individual Defendants from the case without prejudice
based upon Stipulations of Dismissal filed by the plaintiffs and the Individual
Defendants. On February 19, 2003, the Court denied the motion to dismiss the
complaint against Hoover's. Hoover's has approved a Memorandum of Understanding
("MOU") and related agreements setting forth the terms of a settlement between
Hoover's and the plaintiff class. The MOU and related agreements are subject to
a number of contingencies, including the negotiation of a settlement agreement
and approval by the Court.
If the settlement is ultimately approved and implemented in its current
form, Hoover's reasonably foreseeable exposure in this matter, if any, would be
limited to amounts which would be covered by existing insurance. If the
settlement is not approved in its current form, we cannot predict the final
outcome of this matter or whether such outcome or ultimate resolution of this
matter could materially affect our results of operations, cash flows or
financial position. No amount in respect of any potential judgment in this
matter has been accrued in our consolidated financial statements.
Pension Plan Litigation
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. The
complaint, as amended in July 2003 (the "Amended Complaint"), sets forth the
following putative class:
o current D&B employees who are participants in the Dun & Bradstreet
Corporation Retirement Account and were previously participants in its
predecessor plan, The Dun & Bradstreet Master Retirement Plan;
o current employees of Receivable Management Services Corporation ("RMSC")
who are participants in The Dun & Bradstreet Corporation Retirement Account
and were previously participants in its predecessor plan, The Dun &
Bradstreet Master Retirement Plan;
o former employees of D&B or D&B's receivable management services ("RMS")
operations who received a deferred vested retirement benefit under either
the Dun & Bradstreet Corporation Retirement Account or The Dun & Bradstreet
Master Retirement Plan; and
o former employees of D&B's RMS operations whose employment with D&B
terminated after the sale of the RMS operations but who are not employees
of RMSC and who, during their employment with D&B, were "Eligible
Employees" for purposes of The Dun & Bradstreet Career Transition Plan.
The Amended Complaint estimates that the proposed class covers over 5,000
individuals.
There are four counts in the Amended Complaint: Count 1 claims that we
violated ERISA by not paying severance benefits to plaintiffs under our Career
Transtion Plan. Count 2 claims a violation of ERISA in that our sale of the RMS
business to RMSC and the resulting termination of our employees constituted a
prohibited discharge of the plaintiffs and/or discrimination against the
plaintiffs for the "intentional purpose of interfering with their employment
and/or attainment of employee benefit rights which they might otherwise have
attained." Count 3 claims that the plaintiffs were materially harmed by our
alleged violation of 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 and elect to retire early) cannot be enforced against them. Count
4 claims that the 6 3/5% interest rate (the rate is actually 6 3/4%) used to
actuarially reduce early retirement benefits is unreasonable and, therefore,
results in a prohibited forfeiture of benefits under ERISA.
The plaintiffs purport to seek payment of severance benefits; equitable
relief in the form of either reinstatement of employment with D&B or restoration
of employee benefits (including stock options); invalidation of the actuarial
reductions applied to deferred vested early retirement benefits, including
invalidation of the plan rate of 6 3/5% (the actual rate is 6 3/4%) used to
actuarially reduce former employees' early retirement benefits; attorneys' fees
and such other relief as the court may deem just.
We deny all allegations of wrongdoing and are aggressively defending the
case. In September 2003, we filed a motion to dismiss a majority of the claims
in the Amended Complaint on the ground that plaintiffs cannot prevail with
respect to those claims under any set of facts. We are unable to predict at this
time the final outcome of this matter or whether the resolution of this matter
could materially affect our results of operations, cash flows or financial
position. No amount in respect of this matter has been accrued in our
consolidated financial statements.
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 our 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. As a result, the
allocation of the purchase price is subject to refinement.
On April 30, 2003, we paid $6.2 million to acquire 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.
In addition, we paid $1.9 million to acquire 17.5% of RIBES S.p.A., a leading
provider of business information to Italian banks. As a result, together with
the minority interest held by our subsidiary Data House S.p.A., our interest in
RIBES S.p.A. increased to 35%. The transaction was funded with cash on hand.
The Italian acquisitions were accounted for under the purchase method of
accounting in accordance with SFAS No. 141. The purchase price for controlling
interests of the three companies, together with the capitalized transaction
costs allowed under SFAS No. 141, was allocated to the acquired assets and
liabilities on the basis of respective fair value. As a result, goodwill of $7.2
million was recognized and assigned to our International segment.
The impact that the Hoover's, Inc. and Italian acquisitions would have
had on our results had the acquisitions occurred at the beginning of 2003 is not
deemed significant as defined by accounting requirements and, as such, pro-forma
results have not been presented.
Note 9 - Divestitures
Sale of Our European Headquarters Building
On July 31, 2003, we sold our High Wycombe, England, building and
received proceeds of $80.2 million. We continue to operate from a portion of the
building under a multi-year lease after the sale. We recognized a pre-tax loss
on the sale of the building of $13.8 million within Operating Costs.
Sale of Our Israeli Operations
On July 31, 2003, we sold our Israeli operations and recognized a pre-tax
loss of $4.3 million in "Other Income (Expense) - Net".
Sale of Singapore Investment
On July 2, 2003, we sold the equity interest in our Singapore investment
and recognized a pre-tax gain of $1.8 million in "Other Income (Expense) - Net".
Note 10 - 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 reclassified
prior period presentations to conform to this revised segment reporting.
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.
Three Months Ended Nine Months Ended
September 30, September 30,
2003 2002 2003 2002
---- ---- ---- ----
Operating Revenues:
North America $ 229.2 $ 212.2 $ 685.0 $ 667.1
International 103.1 86.7 297.0 252.4
----- ---- ----- -----
Consolidated Total $ 332.3 $ 298.9 $ 982.0 $ 919.5
======== ======== ======== ========
Operating Income (Loss):
North America $ 75.3 $ 67.6 $ 224.0 $ 213.8
International 10.8 7.8 28.5 17.9
----- ---- ----- -----
Total Divisions 86.1 75.4 252.5 231.7
All Other (1) (32.0) (16.6) (81.7) (83.1)
----- ---- ----- -----
Consolidated Total 54.1 58.8 170.8 148.6
Non-Operating Income (Expense)-- Net (6.9) (2.4) (8.4) (14.8)
----- ---- ----- -----
Income before Provision for Income Taxes $ 47.2 $ 56.4 $ 162.4 $ 133.8
======== ======== ======== ========
(1) The following table itemizes "All Other"
Corporate Costs $ (9.9) $ (8.0) $ (30.9) $ (26.9)
Transition Costs (6.7) (8.6) (19.6) (25.3)
Restructuring Expense (1.6) - (17.4) (30.9)
High Wycombe, England, Building Sale (13.8) - (13.8) -
----- ---- ----- -----
Total Other $ (32.0) $ (16.6) $ (81.7) $ (83.1)
======== ======== ======== ========
Supplemental Geographic and Product Line Information:
Three Months Ended Nine Months Ended
September 30, September 30,
2003 2002 2003 2002
---- ---- ---- ----
Geographic and Product Line Revenues:
North America:
Risk Management Solutions $ 149.5 $ 146.5 $ 454.2 $ 451.9
Sales & Marketing Solutions 63.7 60.2 191.9 198.7
Supply Management Solutions 7.7 5.5 20.0 16.5
E-Business Solutions 8.3 - 18.9 -
---------- ---------- --------- ---------
Core Revenue 229.2 212.2 685.0 667.1
Divested Businesses - - - -
---------- ---------- --------- ---------
Total North America $ 229.2 $ 212.2 $ 685.0 $ 667.1
---------- ---------- --------- ---------
International:
Risk Management Solutions $ 81.6 $ 68.7 $ 239.1 $ 197.6
Sales & Marketing Solutions 17.3 14.3 47.4 44.6
Supply Management Solutions 2.2 1.3 7.2 5.7
---------- ---------- --------- ---------
Core Revenue 101.1 84.3 293.7 247.9
Divested Businesses 2.0 2.4 3.3 4.5
---------- ---------- --------- ---------
Total International $ 103.1 $ 86.7 $ 297.0 $ 252.4
---------- ---------- --------- ---------
Consolidated Operating Revenues:
Risk Management Solutions $ 231.1 $ 215.2 $ 693.3 $ 649.5
Sales & Marketing Solutions 81.0 74.5 239.3 243.3
Supply Management Solutions 9.9 6.8 27.2 22.2
E-Business Solutions 8.3 - 18.9 -
---------- ---------- --------- ---------
Core Revenue 330.3 296.5 978.7 915.0
Divested Businesses 2.0 2.4 3.3 4.5
---------- ---------- --------- ---------
Total Revenue $ 332.3 $ 298.9 $ 982.0 $ 919.5
========== ========== ========= =========
September 30, December 31,
Assets: 2003 2002
---- ----
North America $ 425.3 $ 366.0
International 445.4 493.1
---------- ---------
Total Divisions 870.7 859.1
All Other (primarily U.S. pensions and taxes) 635.7 668.6
---------- ---------
Total Assets $ 1,506.4 $ 1,527.7
========== =========
September 30, December 31,
Goodwill: 2003 2002
---- ----
North America $ 118.0 $ 51.6
International 127.4 131.7
---------- ---------
Total Goodwill $ 245.4 $ 183.3
========== =========
Note 11 - Subsequent Events
Sale of Nordic Operations
On October 9, 2003, we signed an agreement to sell our operations in
Sweden, Denmark, Norway, and Finland to Bonnier Affarsinformation AB ("Bonnier
Business Information") for approximately $40 to $43 million. We expect to
recognize a one-time pre-tax gain of approximately $8 to $11 million at the time
the transaction closes. Our Nordic operations generated approximately $44
million in revenue in 2002. We expect the transaction to close in December 2003,
subject to regulatory approvals and customary closing conditions, which would be
a first quarter 2004 event for our International segment as a result of their
November 30 fiscal year end.
We have reclassified the assets and liabilities relating to the Nordic
operations to Assets and Liabilities Held for Sale in our Consolidated Balance
Sheet as of September 30, 2003. Assets Held for Sale of $36.1 million is
primarily made up of accounts receivable, other intangible assets, and goodwill.
Liabilities Held for Sale of $10.8 million is primarily made up of accounts
payable, accrued liabilities, and deferred revenue. The Assets and Liabilities
Held for Sale are subject to change through the closing of the transaction. The
Nordic operations belong to our International segment.
Postretirement Benefits
In the fourth quarter of 2003, an amendment was made to D&B's
Postretirement Benefit Plan. Starting January 1, 2004, we will limit the amount
of our insurance premium contribution based on the amount D&B contributed in
2003 per retiree. This change is expected to reduce our postretirement benefit
obligation by approximately $85 million, subject to changes in economic
condition and the action plan experience. This non cash reduction will be
amortized over the next five to six years, reducing the annual postretirement
benefit costs by approximately $17 million a year and approximately $3 million
in the fourth quarter 2003.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
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. 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 believe do not
reflect our underlying business performance (which we refer to as "non-core
gains and charges"). For the third quarter 2003, these non-core gains and
charges were restructuring charges of $1.6 million and a loss on the sale of our
High Wycombe, England, building of $13.8 million. There were no non-core gains
and charges for the third quarter 2002. For the nine months ended September 30,
2003, non-core gains and charges were $17.4 million of total restructuring
charges, $13.8 million representing the loss on the High Wycombe, England,
building offset by $7.0 million of insurance recovery related to the World Trade
Center tragedy. For the nine months ended September 30, 2002, non-core gains and
charges were restructuring charges of $30.9 million.
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 US GAAP and should not be
considered in isolation or as substitutes for results prepared in accordance
with US 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.
Overview
Our discussion and analysis of our financial condition and results of
operations for the third quarter 2003, and for the nine months ended September
30, 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. Our financial
statements should be read in conjunction with the consolidated financial
statements and related notes, and management's discussion and analysis of
financial condition and results of operations, which appear in D&B's Annual
Report on Form 10-K for the year ended December 31, 2002.
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:
o U.S. and Canada, which we refer to as "North America," is our largest
segment, contributing 69% and 70% of our core revenue for the third quarter
2003 and nine months ended September 30, 2003, respectively;
o Europe, Asia Pacific and Latin America, which we refer to as
"International," representing 31% and 30% of our core revenue for the third
quarter 2003 and nine months ended September 30, 2003, respectively.
In each segment, D&B's core product lines are: Risk Management Solutions,
Sales & Marketing Solutions and Supply Management Solutions.
o Risk Management Solutions-- our largest solution set, contributed 70% and
71% of our core revenue for the third quarter 2003 and nine months ended
September 30, 2003, respectively;
o Sales & Marketing Solutions-- our next largest solution set, contributed
25% and 24% of our core revenue for the third quarter 2003 and nine months
ended September 30, 2003, respectively;
o Supply Management Solutions-- one of our smaller solution sets, contributed
3% of our core revenue for the third quarter 2003 and nine months ended
September 30, 2003.
The 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.
In addition, beginning with our first quarter 2003, we began reporting a
fourth core product line, E-Business Solutions, representing the results of
Hoover's, Inc. since we acquired the business on March 3, 2003. E-Business
Solutions contributed 2% of our core revenue for the third quarter 2003 and nine
months ended September 30, 2003, and is included in our North American segment
results.
In 2001, we launched a series of E-Business offerings in North America
that provide access to, and delivery of, D&B products via the web. We continue
to report the results of these product offerings in our Risk Management
Solutions and Sales & Marketing Solutions product lines.
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 within these solution sets.
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 core revenue for the third quarter 2003 and nine months ended
September 30, 2003. Traditional Risk Management Solutions constituted 58% and
59% of D&B's core revenue for the third quarter 2003 and nine months ended
September 30, 2003, respectively. 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 core
revenue for the third quarter 2003 and nine months ended September 30, 2003.
Value-added Risk Management Solutions constituted 12% of D&B's core revenue for
the third quarter 2003 and nine months ended September 30, 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 62% and 59% of our
Sales & Marketing Solutions core revenue for the third quarter 2003 and nine
months ended September 30, 2003, respectively. Traditional Sales & Marketing
constituted 16% and 14% of D&B's core revenue for the third quarter 2003 and
nine months ended September 30, 2003, respectively. Our value-added Sales &
Marketing Solutions generally include automated decision-making and customer
information management solutions, and constituted 38% and 41% of our Sales &
Marketing Solutions core revenue for the third quarter 2003 and nine months
ended September 30, 2003, respectivley. Value-added Sales & Marketing Solutions
constituted 9% and 10% of D&B's core revenue for the third quarter 2003 and nine
months ended September 30, 2003, respectively.
By utilizing our proprietary DUNSRight (TM) process we continue to provide
customers with quality information whenever and wherever they need it. The
DUNSRight (TM) quality process allows us to achieve best-in-class data quality.
The process includes collecting data from multiple sources and enhancing it into
insightful information that drives profitable decisions. The process consists of
quality assurance plus five quality drivers: Global Data Collection, Entity
Matching, the D-U-N-S (R) Number, Corporate Linkage, and Predictive Indicators.
The DUNSRight (TM) quality process has been a key enabler of progress to date
and will continue to be crucial to our growth going forward.
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 US GAAP.
Consolidated Revenues
The following tables present our revenue by segment and product line for
the third quarter 2003 and 2002 and for the nine months ended September 30, 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) Growth (Decline)
vs. Prior Year Less: vs. Prior Year
Three Months Ended Period After Effects of Period Before
September 30, Effects of Foreign Foreign Effects of Foreign
2003 2002 Exchange Exchange Exchange
---- ----
(Amounts in millions)
Revenues by Segment:
North America $229.2 $212.2 8% - 8%
International 101.1 84.3 20% 14% 6%
----- ----
Core Revenue 330.3 296.5 11% 4% 7%
Divested Businesses 2.0 2.4 (14%) 7% (21%)
--- ---
Total Revenue $332.3 $ 298.9 11% 4% 7%
====== =======
Growth (Decline) Growth (Decline)
vs. Prior Year Less: vs. Prior Year
Three Months Ended Period After Effects of Period Before
September 30, Effects of Foreign Foreign Effects of Foreign
2003 2002 Exchange Exchange Exchange
---- ----
(Amounts in millions)
Revenues by Product Line:
Risk Management Solutions $ 231.1 $215.2 7% 5% 2%
Sales & Marketing Solutions 81.0 74.5 9% 3% 6%
Supply Management 9.9 6.8 45% 5% 40%
Solutions
E-Business Solutions 8.3 - N/M N/M N/M
--- ---
Core Revenue 330.3 296.5 11% 4% 7%
Divested Businesses 2.0 2.4 (14%) 7% (21%)
--- ---
Total Revenue $332.3 $298.9 11% 4% 7%
====== ======
Growth (Decline) Growth (Decline)
vs. Prior Year Less: vs. Prior Year
Nine Months Ended Period After Effects of Period Before
September 30, Effects of Foreign Foreign Effects of Foreign
2003 2002 Exchange Exchange Exchange
---- ----
(Amounts in millions)
Revenues by Segment:
North America $685.0 $667.1 3% 1% 2%
International 293.7 247.9 19% 17% 2%
----- -----
Core Revenue 978.7 915.0 7% 5% 2%
Divested Businesses 3.3 4.5 (26%) 4% (30%)
--- ---
Total Revenue $ 982.0 $ 919.5 7% 5% 2%
======= =======
Growth (Decline) Less: Growth (Decline)
vs. Prior Year Effects vs. Prior Year
Nine Months Ended Period After of Period Before
September 30, Effects of Foreign Foreign Effects of Foreign
2003 2002 Exchange Exchange Exchange
---- ----
(Amounts in millions)
Revenues by Product Line:
Risk Management Solutions $ 693.3 $649.5 7% 6% 1%
Sales & Marketing Solutions 239.3 243.3 (2%) 2% (4%)
Supply Management Solutions 27.2 22.2 22% 5% 17%
E-Business Solutions 18.9 - N/M N/M N/M
---- ---
Core Revenue 978.7 915.0 7% 5% 2%
Divested Businesses 3.3 4.5 (26%) 4% (30%)
--- ---
Total Revenue $ 982.0 $919.5 7% 5% 2%
======= ======
Three Months Ended September 30, 2003
For the three months ended September 30, 2003, core revenue increased
$33.8 million, or 11% (including four percentage points of growth from favorable
movements in foreign exchange rates and five percentage points from
acquisitions), compared with the three months ended September 30, 2002. The
revenue increase was driven by revenue growth in North America of $17.0 million
and International of $16.8 million, or 8% and 20% (including 14 percentage
points of growth from favorable movements in foreign exchange rates, for
International), respectively. Total revenue for the third quarter 2003 includes
revenue from our Israel business, which was divested in the third quarter 2003.
Total revenue for the third quarter 2002 includes revenue from our Israeli
business and Korean business (which was divested in the fourth quarter 2002).
On a product-line basis, our core revenue results in the third quarter of
2003 versus the third quarter of 2002 reflect:
o a $15.9 million, or 7%, growth in Risk Management Solutions, including five
percentage points of growth from favorable movements in foreign exchange
rates and three percentage points of growth due to the acquisition of Data
House and the Italian real estate acquisitions. Traditional Risk Management
Solutions grew 6%, and our value-added Risk Management Solutions grew 14%,
benefiting by five and four percentage points of growth due to the effects
of foreign exchange, respectively. Traditional Risk Management Solutions
continues to contribute to this improvement through our enhanced BIR
product which was released in the second quarter 2003, at a higher price,
as well as the growth in other traditional products including Comprehensive
Report, Self-Analysis, and Monitoring. This growth has been partially
offset in our International segment by the continued competition in some of
our larger markets, as well as competitive pricing pressures on some of our
low-end products. In our value-added Risk Management Solutions, our
portfolio management solutions products continued to perform well in the
United States, which reflects the benefits from our recent investment
spending in Enterprise Risk Assessment Manager, that help customers manage
their credit portfolios. The increase in value-added Risk Management
Solutions can also be attributed to our customers' preference to continue
to automate their decision making process through products such as Global
Decision Maker, and integrate their existing systems using Toolkit and Data
Integrator solutions.
o a $6.5 million, or 9%, increase in Sales & Marketing Solutions, including
three percentage points of favorable movement in foreign exchange rates.
Traditional Sales & Marketing Solutions grew 2%, while our value-added
Sales & Marketing Solutions grew 21%. Both growth rates are reflecting two
percentage points of growth from foreign exchange. The overall growth in
Sales & Marketing Solutions is largely driven by the improvement in
value-added sales in our North America segment and traditional product
sales in our International segment. Contributing to the improvement in
North America were two of our larger value-added products, Customer
Information Management products and our high-end prospecting solutions,
including Market Spectrum.
o a $3.1 million, or 45%, increase in Supply Management Solutions on a small
base, reflecting investment spending and five percentage points of growth
from favorable movements in foreign exchange rates. This growth came from
both our North America and International segments. Within North America the
increase reflects the trend of customers focusing on improving their
operating results through the optimization of the procurement process. The
growth in our International segment is driven by increased sales of our
Data Rationalization and Spend Analysis products.
o $8.3 million of revenue from E-Business Solutions, representing the results
of Hoover's, Inc. We continue to see growth in this product line as a
result of an increase in the subscriber base.
Nine Months Ended September 30, 2003
For the nine months ended September 30, 2003, core revenue increased
$63.7 million, or 7% (including five percentage points of growth from favorable
movements in foreign exchange rates and four percentage points from
acquisitions), compared with the nine months ended September 30, 2002. The
revenue increase was driven by revenue growth in both our North America segment
of $17.9 million, or 3% (including one percentage point of growth from favorable
movements in foreign exhange rates), and our International segment of $45.8
million, or 19% (including 17 percentage points of growth from favorable
movements in foreign exhange rates). Total revenue for the nine months ended
September 30, 2003 includes revenue from our Israel business which was divested
in the third quarter 2003. Total revenue for the nine months ended September 30,
2002 includes revenue from our Israeli business and Korean business (which was
divested in the fourth quarter 2002).
On a product-line basis, our core revenue results for the nine months
ended September 30, 2003 versus the nine months ended September 30, 2002
reflect:
o a $43.8 million, or 7%, growth in Risk Management Solutions, including
six percentage points of growth from favorable movements in foreign
exchange rates and three percentage points of growth due to the
acquisition of Data House and the Italian real estate acquisitions. For
the nine months ended September 30, 2003, Risk Management Solutions was
up 1% before the effects of foreign exchange, driven by the improved
third quarter results in both North America and International.
o a $4.0 million, or 2%, decrease in Sales & Marketing Solutions,
including two percentage points of favorable movement in foreign
exchange rates. The 4% decline in Sales & Marketing Solutions, before
the effects of foreign exchange, reflects the continued improved
results in the third quarter from a 6% decline, including three
percentage points of favorable impacts from foreign exchange, or a 9%
decline before the effects of foreign exchange, in the six months ended
June 30, 2003.
o a $5.0 million, or 22%, increase in Supply Management Solutions on a
small base, reflecting investment spending and five percentage points
of growth from favorable movements in foreign exchange rates. This
growth came from both our North America and International segments,
primarily driven by customers focusing on improving their operating
results through the optimization of the procurement process.
o $18.9 million of revenue from E-Business Solutions, representing the
results of Hoover's, Inc. We continue to see growth in this product
line as a result of an increase in the subscriber base.
Consolidated Operating Costs
The following table presents our consolidated operating costs and
operating income for the quarter and nine months ended September 30, 2003 and
2002:
Three Months Ended Nine Months Ended
September 30, September 30,
2003 2002 2003 2002
---- ---- ---- ----
(Amounts in millions) (Amounts in millions)
Operating Expenses $117.8 $100.3 $325.7 $311.3
Selling and Administrative Expenses 144.2 118.9 421.6 368.4
Depreciation and Amortization 14.6 20.9 46.5 60.3
Restructuring Charge 1.6 - 17.4 30.9
--------------- -------------- -------------- ---------------
Operating Costs $ 278.2 $ 240.1 $811.2 $770.9
=============== ============== ============== ===============
Operating Income $ 54.1 $ 58.8 $170.8 $148.6
=============== ============== ============== ===============
Operating expenses of $117.8 million for the three months ended September
30, 2003 were up 18% compared to the three months ended September 30, 2002. The
increase was primarily due to the loss of $13.8 million on the sale of our High
Wycombe, England, building in July 2003.
On a year-to-date basis, operating expenses increased 5% to $325.7
million. The increase was primarily due to the loss of $13.8 million on the sale
of our High Wycombe, England, building.
Selling and administrative expenses increased 21% to $144.2 million in
the third quarter of 2003, compared with $118.9 million in the third quarter of
2002. The increase was primarily due to additional costs related to revenue
generating investments, such as additions to our sales force to improve our
marketplace coverage in Sales & Marketing Solutions as well as additional costs
(such as commissions) incurred as a result of increased revenues. Additionally,
we have increased our expense base as a result of consolidating the Hoover's,
Inc., Data House, and three Italian real estate acquisitions. The increase in
the costs mentioned above was partially offset by administrative cost savings
such as lower compensation costs achieved through our Financial Flexibility
program.
On a year-to-date basis, selling and administrative expenses increased
14% to $421.6 million. The increase was primarily due to additional costs as a
result of the Hoover's, Inc, Data House, and three Italian real estate
acquisitions. Also contributing to the increase were costs relating to revenue
generating investments, such as additions to our sales force to improve our
marketplace coverage in Sales & Marketing Solutions as well as additional costs
incurred as a result of increased revenues.
We had net pension income of $5.3 million and $13.8 million for the three
and nine months ended September 30, 2003, respectively, compared to $7.8 million
and $25.2 million for the three and nine months ended September 30, 2002,
respectively. 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. Higher non-cash pension costs resulting from changes in the
actuarial assumptions for the U.S. Retirement Plan have resulted in the decline
in net pension income compared to 2002.
Depreciation and amortization decreased 30% to $14.6 million for the
third quarter 2003, compared to $20.9 million for the third quarter 2002. The
decrease in the third 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 2003. The lower capital spending is a result of D&B
delivering more of our products over the web and in turn, investment projects
are becoming less capital intensive.
Year-to-date depreciation and amortization decreased by 23% to $46.5
million, compared to $60.3 million for the nine months ended September 30, 2002.
The decrease in the nine months ended September 30, 2003 was the result of the
same factors that affected the third quarter of 2003.
During the third quarter of 2003, we recognized a $1.6 million charge in
connection with the fourth phase of our Financial Flexibility program for
severance and termination costs. This completes the charges for the fourth phase
of our Financial Flexibility program.
As of September 30, 2003, we have terminated approximately 3,200
employees 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. 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 3,200, reflecting the elimination of 3,500 positions (including
300 open positions).
Year-to-date restructuring charges of $17.4 million have been recognized
in connection with the fourth phase of our Financial Flexibility program. As of
September 30, 2003 we have recorded $17.1 million for severance and termination
costs related to approximately 500 employees and $0.3 million for lease
termination obligations. Total restructuring charges are down 44% from prior
year levels due primarily to the $10.6 million of asset write-offs recognized as
part of the third phase of our Financial Flexibility program in connection with
the sale of our Berkeley Heights facility to CSC during the second quarter of
2002.
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 $17.1 million charge for severance and termination
costs above.
Interest Income (Expense) -- Net
The following table presents our net interest income and expense for the
quarter and nine months ended September 30, 2003 and 2002:
Three Months Ended Nine Months Ended
September 30, September 30,
2003 2002 2003 2002
---- ---- ---- ----
(Amounts in millions) (Amounts in millions)
Interest Income $1.1 $0.7 $2.7 $2.0
Interest Expense (4.8) (4.9) (14.0) (14.8)
--------------- -------------- --------------- ---------------
Interest Expense - Net $(3.7) $(4.2) $(11.3) $(12.8)
=============== ============== =============== ===============
For the three months ended September 30, 2003, interest income increased
$0.4 million and interest expense decreased $0.1 million. For the nine months
ended September 30, 2003, interest income increased $0.7 million and interest
expense decreased $0.8 million. The increases in interest income were primarily
due to additional invested amounts of our combined cash and marketable
securities, both short and long term, while the decreases in interest expense
were primarily due to lower interest rates.
Other Income (Expense) -- Net
The following table presents our "Other Income (Expense) -- Net" for the
quarter and nine months ended September 30, 2003 and 2002:
Three Months Ended Nine Months Ended
September 30, September 30,
2003 2002 2003 2002
---- ---- ---- ----
(Amounts in millions) (Amounts in millions)
Miscellaneous Other Income (Expense) - Net $(0.7) $(0.8) $ (1.6) $(1.7)
Insurance Recovery related to World Trade Center
Tragedy - - 7.0 -
Loss on Sale of Israel Business (4.3) - (4.3) -
Investment write-off of Avantrust, LLC - - - (2.9)
Gain on Sale of Equity Interests in Singapore
Business 1.8 2.6 1.8 2.6
--------------- -------------- --------------- ---------------
$(3.2) $1.8 $2.9 $(2.0)
=============== ============== =============== ===============
For the three months ended September 30, 2003, Other Income (Expense) -
Net decreased $5.0 million, primarily due to the loss on the sale of our Israel
business in the third quarter 2003 combined with the gain on the sale of equity
interests in our Singapore business during the third quarter 2002. These were
partially offset by the gain on the sale of equity interests in our Singapore
business in the third quarter 2003.
For the nine months ended September 30, 2003, Other Income (Expense) -
Net increased $4.9 million, primarily due to receipt of a $7.0 million
settlement on an insurance claim to recover losses related to the events of
September 11, 2001 and our $1.8 million gain on the sale of equity interests in
our Singapore business. These items were partially offset by the $4.3 million
loss on the sale of our Israel business in the third quarter 2003.
Provision for Income Taxes
D&B's effective tax rate was 38.7% for the third quarter of 2003,
negatively impacted by the non-deductibility of certain costs related to the
sale of our High Wycombe, England, building (3.4 points) and the
non-deductibility in some countries of certain items included within the
restructuring charge (0.6 points), partially offset by a tax benefit related to
the sale of our Israeli operations (2.3 points) and the benefits of state tax
planning initiatives and global tax planning (1.5 points). Our effective tax
rate for the third quarter of 2002 was 38.5% and had no material items impacting
the effective rate.
For the nine months ended September 30, 2003 our effective tax rate was
37.7%. The effective tax rate for 2003 has been negatively impacted by the
non-deductibility of certain costs related to the sale of our High Wycombe,
England, building (1.2 points) and the non-deductibility in some countries of
certain items included within the restructuring charge (0.4 points), partially
offset by a tax benefit related to the sale of our Israeli operations (0.9
points) and the benefits of state tax planning initiatives and global tax
planning (1.0 points). The effective tax rate for the nine months ended
September 30, 2002 was 39.6%, negatively impacted by the non-deductibility in
some countries of certain items included within the restructuring charge (1.6
points).
Equity in Net Losses of Affiliates
There were no material amounts recorded as Equity in Net Losses of
Affiliates in 2003. For the nine months ended September 30, 2002 we recorded
$1.7 million as Equity in Net Losses of Affiliates. These net losses were
primarily related to Avantrust LLC, our joint venture with American
International Group, Inc. In the second quarter 2002, we exited Avantrust LLC.
Earnings per Share
We reported earnings per share, or EPS, in the quarter and nine months
ended September 30, 2003 and 2002, as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
2003 2002 2003 2002
---- ---- ---- ----
Basic Earnings Per Share $0.39 $0.47 $1.36 $1.06
===== ===== ===== =====
Diluted Earnings Per Share $0.38 $0.45 $1.32 $1.03
===== ===== ===== =====
For the three months ended September 30, 2003, basic EPS decreased 17%,
compared with the third quarter of 2002, resulting from a 17% decrease in net
income. Diluted EPS decreased 16%, compared with the third quarter of 2002, also
primarily driven by a 17% decrease in net income partially offset by a 1%
reduction in the weighted average number of diluted shares outstanding. The
decreases in EPS were driven by the loss on the sale of our High Wycombe,
England, building of $13.8 million. In addition, for the quarter ended September
2003 we had a restructuring charge of $1.6 million as compared to no
restructuring charge in the quarter ended September 2002.
For the nine months ended September 30, 2003, basic EPS increased 28%,
compared with the nine months ended September 30, 2002, reflecting a 28%
increase in net income. Diluted EPS increased 28%, compared with the nine months
ended September 30, 2002, also primarily driven by a 28% increase in net income
and a 1% reduction in the weighted average number of diluted shares outstanding.
The primary driver in EPS growth is growth from operations and the $7.0 million
settlement on an insurance claim to recover losses related to the events of
September 11, 2001. Partially offsetting the growth was the $13.8 million loss
on the sale of our High Wycombe, England, building and the $17.4 million
restructuring charge, both in 2003, and the $30.9 million restructuring charge
in 2002.
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 reclassified prior period
presentations to conform to this revised segment reporting.
North America
North America is our largest segment, representing 69% and 70% of our
core revenue for the third quarter 2003 and nine months ended September 30,
2003, respectively. The following tables present our North American product line
revenue for the quarter and nine months ended September 30, 2003 and 2002. The
tables also reconcile the non-GAAP measure of revenue before the effect of
foreign exchange to the GAAP measure of total revenue.
Growth (Decline) Growth (Decline)
vs. Prior Year Less: vs. Prior Year
Three Months Ended Period After Effects of Period Before
September 30, Effects of Foreign Effects of Foreign
2003 2002 Foreign Exchange Exchange Exchange
---- ----
(Amounts in millions)
Revenues:
Risk Management Solutions $149.5 $ 146.5 2% - 2%
Sales & Marketing Solutions 63.7 60.2 6% - 6%
Supply Management Solutions 7.7 5.5 38% - 38%
E-Business Solutions 8.3 - N/M N/M N/M
------ ------
Total North America Revenue $229.2 $212.2 8% - 8%
====== ======
Growth (Decline) Growth (Decline)
vs. Prior Year Less: vs. Prior Year
Nine Months Ended Period After Effects of Period Before
September 30, Effects of Foreign Effects of Foreign
2003 2002 Foreign Exchange Exchange Exchange
---- ----
(Amounts in millions)
Revenues:
Risk Management Solutions $454.2 $ 451.9 1% 1% 0%
Sales & Marketing Solutions 191.9 198.7 (3%) 1% (4%)
Supply Management Solutions 20.0 16.5 20% - 20%
E-Business Solutions 18.9 - N/M N/M N/M
------ ------
Total North America Revenue $ 685.0 $ 667.1 3% 1% 2%
======= =======
Three Months Ended September 30, 2003
North American revenue increased $17.0 million, or 8%, from the third
quarter of 2002. The increase is due to increased revenue in all of our product
lines. The acquisition of Hoover's, Inc. contributed an additional $8.3 million,
or four percentage points of growth.
On a product-line basis, North America's core revenue results reflect:
o a $3.0 million, or 2%, increase in Risk Management Solutions. Traditional
Risk Management Solutions, which accounted for 79% of total North American
Risk Management Solutions, was flat. Value-added Risk Management Solutions
increased 9%, as our portfolio management solutions products continued to
perform well in the United States. This increase reflects the benefits of
our recent investment spending on our Enterprise Risk Assessment Manager
product. The improvement also reflects our customers continued shift
towards automating their decision making process.
o a $3.5 million, or 6%, increase in Sales & Marketing Solutions. Traditional
Sales & Marketing Solutions, which accounted for 58% of total North
American Sales & Marketing Solutions, decreased 4%. This decline is
indicative of the current economic environment. This area of our business
is sensitive to changes in the economy, as sales and marketing expenses are
often viewed as discretionary spending by our customers. This decline was
offset by the continued strength of value-added Sales & Marketing
Solutions, which increased 22%. Within our value-added Sales & Marketing
Solutions the increase was driven by Customer Information Management
products and our high-end prospecting solutions, including Market Spectrum.
o a $2.2 million, or 38%, increase in Supply Management Solutions reflects
the trend of customers focusing on improving operating results through the
optimization of the procurement process.
o $8.3 million of revenue from E-Business Solutions, representing the results
of Hoover's, Inc.
North America's operating income for the third quarter 2003 was $75.3
million, compared to $67.6 million for the third quarter 2002. The increase in
operating income was primarily due to an 8% increase in the overall North
America revenue for the third quarter partially offset by additional expenses
associated with Hoover's, Inc.
Nine Months Ended September 30, 2003
North America revenue increased, $17.9 million, or 3%, as compared to the
nine month period ended September 30, 2002. The acquisition of Hoover's, Inc.
contributed $18.9 million, or three percentage points of growth.
On a product-line basis, North America's revenue results reflect:
o a $2.3 million, or 1% increase in Risk Management Solutions. The results
for the nine months ended September 30, 2003 continued to improve from a 2%
decline in the first quarter 2003 and a flat six months ended June 30,
2003. Traditional Risk Management Solutions continues to contribute to this
improvement through our enhanced BIR product which was released in the
second quarter 2003, at a higher price, as well as the growth in other
traditional products including Comprehensive Report, Self-Analysis, and
Monitoring. Additionally, our value-added Risk Management Solutions
products continued to perform well in the United States. This increase also
reflects the benefits of our recent investment spending in our Enterprise
Risk Assessment Manager product. The improvement further reflects our
customers continued shift towards automating their decision making process.
o a $6.8 million, or 3%, decrease in Sales & Marketing Solutions. Our nine
months results reflect a continued improvement relative to a 15% decline in
the first quarter 2003 and a 7% decrease for the six months ended June 30,
2003. The improvement was driven by a 15% growth in our value-added Sales &
Marketing Solutions, which offset declines in the market sensitive
Traditional Sales & Marketing Solutions segment. Within our value-added
Sales & Marketing Solutions the increase was driven by Customer Information
Management products and our high-end prospecting solutions, including
Market Spectrum.
o a $3.5 million, or 20% increase in Supply Management Solutions reflects the
trend of customers focusing on improving their operating results through
the optimization of the procurement process.
o $18.9 million of revenue from E-Business Solutions, representing the
results of Hoover's Inc.
North America's operating income for the nine months ended September 30,
2003 was $224.0 million, an increase of $10.2 million, or 5% from the nine
months ended September 30, 2002. Revenues increased 3% from the prior year.
Expenses increased from the prior year as a result of higher non-cash pension
costs resulting from changes in the actuarial assumptions for the U.S.
Retirement Plan and increased expenses associated with our acquisition of
Hoover's, Inc. Partially offsetting these expense increases were savings
associated with our Financial Flexibility initiatives.
International
International represented 31% and 30% of our core revenue for the third
quarter 2003 and the nine months ended September 30, 2003, respectively. The
following tables present our International product line revenue for the quarter
and nine months ended September 30, 2003 and 2002. Additionally, the 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)
vs. Prior Year Less: Growth (Decline)
Three Months Ended Period After Effects of vs. Prior Year
September 30, Effects of Foreign Period Before
2003 2002 Foreign Exchange Exchange Effects of Foreign Exchange
---- ----
(Amounts in millions)
Revenues:
Risk Management Solutions $ 81.6 $ 68.7 19% 15% 4%
Sales & Marketing Solutions 17.3 14.3 20% 12% 8%
Supply Management Solutions 2.2 1.3 73% 22% 51%
--- ---
International Core Revenue 101.1 84.3 20% 14% 6%
Divested Businesses 2.0 2.4 (14%) 7% (21%)
--- ---
Total International Revenue $ 103.1 $ 86.7 19% 14% 5%
======== =======
Growth (Decline)
vs. Prior Year Less: Growth (Decline)
Nine Months Ended Period After Effects of vs. Prior Year
September 30, Effects of Foreign Period Before
2003 2002 Foreign Exchange Exchange Effects of Foreign Exchange
---- ----
(Amounts in millions)
Revenues:
Risk Management Solutions $ 239.1 $ 197.6 21% 17% 4%
Sales & Marketing Solutions 47.4 44.6 6% 13% (7%)
Supply Management Solutions 7.2 5.7 28% 21% 7%
--- ---
International Core Revenue 293.7 247.9 19% 17% 2%
Divested Businesses 3.3 4.5 (26%) 4% (30%)
--- ---
Total International Revenue $ 297.0 $ 252.4 18% 16% 2%
======= =======
Three Months Ended September 30, 2003
International core revenue increased $16.8 million, or 20%, from the
third quarter of 2002. The increase in International's revenue was driven by 14
percentage points of growth due to the favorable effect of foreign exchange rate
movements and eight percentage points of growth due to our acquisition of Data
House and the additional Italian real estate acquisitions. Total revenue for the
third quarter 2003 includes revenue from our Israeli business, which was
divested in the third quarter 2003. Total revenue for the third quarter 2002
includes revenue from our Israeli business and Korean business (which was
divested in the fourth quarter 2002).
On a product-line basis, International's core revenue results reflect:
o a $12.9 million, or 19%, increase in Risk Management Solutions, including
15 percentage points of growth due to favorable movements in foreign
exchange rates and nine percentage points of growth due to the acquisition
of Data House and the additional Italian real estate acquisitions.
Traditional Risk Management Solutions increased 17%, driven by 14
percentage points of growth due to favorable movements in foreign exchange
rates and 10 percentage points of growth due to the acquisition of Data
House and the additional Italian real estate acquisitions. Within our
traditional products, we continue to experience competition in some of our
larger markets. We are also experiencing competitive pricing pressures on
our low-end traditional products in the United Kingdom and Nordic region.
These competitive and pricing pressures have been partially offset by the
continued success of our new monitoring product, e-Portfolio. Value-added
Risk Management Solutions increased 36%, including 17 percentage points of
growth due to favorable movements in foreign exchange rates. The increase
is driven by the customers' preference to continue to automate their
decisioning process through products such as Global Decision Maker, and
integrate their existing systems using Toolkit solutions.
o a $3.0 million, or 20%, increase in Sales & Marketing Solutions, including
12 percentage points of growth due to favorable movements in foreign
exchange rates. The overall growth in Sales & Marketing Solutions is the
result of the following management actions: (i) added sales leadership in
five major markets, each with a dedicated sales team, (ii) continued
increase of focus by our sales teams on value-added products, (iii)
expanded demand generation programs, and (iv) growth in linkage products
resulting from our customers' move from CD to Web-based solutions.
Traditional Sales & Marketing Solutions increased 23%, including 13
percentage points of growth due to favorable movements in foreign exchange
rates. We continue to see competitive pricing pressure in the low-end list
and label business and falling demand for CD products, within our
traditional Sales & Marketing Solutions products. Value-added Sales &
Marketing Solutions increased by 12%, including 13 percentage points due to
favorable effects of foreign exchange.
o a $0.9 million, or 73%, increase in Supply Management Solutions, including
22 percentage points of growth due to favorable movements in foreign
exchange rates. The growth is driven by increased sales of our Data
Rationalization and Spend Analysis products.
International's operating income increased by $3.0 million, or 42%,
compared with the third quarter 2002. The increase is primarily due to a lower
cost base as a result of our Financial Flexibility program combined with a 20%
increase in core revenue. The cost reductions were made in the technology,
administrative, and data collection areas.
Nine Months Ended September 30, 2003
International core revenue increased $45.8 million, or 19%, from the nine
months ended September 30, 2003. The increase in International's core revenue
was driven by 17 percentage points of growth due to the favorable effect of
foreign exchange rate movements and seven percentage points of growth due to our
acquisition of Data House and the additional Italian real estate acquisitons.
Total revenue for the third quarter 2003 includes revenue from our Israeli
business, which was divested in the third quarter 2003. Total revenue for the
third quarter 2002 includes revenue from our Israeli business and Korean
business (which was divested in the fourth quarter 2002).
On a product-line basis, International's core revenue results reflect:
o a $41.5 million, or 21%, increase in Risk Management Solutions, including
17 percentage points of growth due to favorable movements in foreign
exchange rates and nine percentage points of growth due to the acquisition
of Data House and the additional Italian real estate acquisitions.
Traditional Risk Management Solutions increased 20%, driven by 17
percentage points of growth due to favorable movements in foreign exchange
rates and nine percentage points of growth due to the acquisition of Data
House and the additional Italian real estate acquisitions. We continue to
experience both competitive and pricing pressures in some of our larger
markets. These pressures are partially offset by the continued success of
our new monitoring product, e-Portfolio. Value-added Risk Management
Solutions increased 29%, including 15 percentage points of growth due to
the favorable effects of foreign exchange. The continued improvement in
value-added products reflects our customers continued shift towards
automating their decision making process.
o a $2.8 million, or 6%, increase in Sales & Marketing Solutions, including
13 percentage points of growth due to favorable movements in foreign
exchange rates. Traditional Sales & Marketing Solutions increased by 3%,
and our value-added Sales & Marketing Solutions increased by 16%, each
assisted by 13 percentage points of growth due to favorable effects of
foreign exchange. The decline (before foreign exchange impacts) of the
Traditional Sales & Marketing Solutions is indicative of a very competitive
market, specifically in our low-end list and label business. The increase
in our value-added Sales & Marketing Solutions represents a continued
improvement in growth from the second quarter 2003. The increase is
primarily driven by the following management actions: (i) added sales
leadership in five major markets, each with a dedicated sales team, (ii)
continued increase of focus by our sales teams on value-added products,
(iii) expanded demand generation programs, and (iv) growth in linkage
products resulting from our customers' move from CD to Web based solutions.
o a $1.5 million, or 28%, increase in Supply Management Solutions, including
21 percentage points of growth due to favorable movements in foreign
exchange rates.
International's operating income increased by $10.6 million, or 60%,
compared with the nine months ended September 30, 2002. The increase is
primarily due to a 19% increase in core 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.
The following factors affecting our International business create
particular challenges to our revenue growth:
o In most International 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 data
investment decisions were not made in a coordinated fashion across the
International marketplace. While we have made significant investments to
mitigate the situation, we are still faced with uneven data quality in some
local markets.
We will continue to use different approaches to improve our competitive
position from market to market worldwide. In some markets, we are investing to
strengthen our position, either through organic growth or by acquisition. In
other markets, we may establish strategic relationships to strengthen our global
data coverage and our customer value propositions. We have used each of these
approaches already in different parts of the world, and we anticipate evaluating
and implementing these and other approaches in the future.
Additionally, we will also continue to leverage our DUNSRight (TM)
quality process to establish leadership positions in our International markets.
Liquidity and Financial Position
At September 30, 2003, cash and cash equivalents totaled $199.7 million,
an increase from $191.9 million at December 31, 2002. This $7.8 million increase
primarily reflects $98.0 million used for the acquisition of Hoover's and three
small Italian real estate companies (net of cash acquired), $121.3 million used
to repurchase shares, and $19.8 million of investments in capital expenditures
and capitalized software, offset by $156.3 million of cash provided
from operations, $80.2 million of proceeds related to the sale of our High
Wycombe, England, building, and $18.3 million of net proceeds received in
connection with our stock incentive plans.
D&B's $100 million 364-day revolving credit facility expired in September
2003. We renewed this facility in September 2003 for $100 million. D&B also has
an additional $175 million term revolving credit facility expiring in September
2005. Under these facilities, D&B has the ability to borrow at prevailing
short-term interest rates. These facilities also support D&B's commercial paper
borrowings up to $275 million. D&B has not drawn on these facilities since their
inception and has no borrowings outstanding under these facilities at September
30, 2003. D&B has not borrowed under its commercial paper program in 2003.
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 for the nine months ended
September 30, 2003, was $156.3 million, while operating activities in the same
period of 2002 provided net cash of $133.7 million. This increase of $22.6
million was primarily due to $7.5 million of improvement in our accounts
receivables due to increased collections and $9.9 million of improvement in our
accrued liabilities due to ongoing operating expense reductions as a result of
our Financial Flexibility programs. 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 nine months ended September 30, 2003, D&B made payments of $23.8
million related to the restructurings associated with our Financial Flexibility
program, compared to payments of $25.2 million in the same period of 2002.
Cash Used in Investing Activities
Net cash used in investing activities totaled $49.3 million during the
first nine months of 2003, compared with net cash used in investing activities
of $41.6 million during the first nine months of 2002. This change was primarily
related to payments of $92.5 million (net of cash acquired) for the acquisition
of Hoover's and $5.5 million (net of cash acquired) for the acquisition of three
small Italian real estate companies. Also, as part of this transaction we made a
$1.9 million payment to acquire 17.5% of RIBES S.p.A., a leading provider of
business information to Italian banks, during the second quarter of 2003. We
also received $11.7 million of short-term marketable securities as part of the
Hoover's acquisition. Partially offsetting the payments above was the $80.2
million of cash proceeds received from the sale of our High Wycombe, England,
building in the third quarter 2003. During the first nine months of 2002, we
received $21.5 million of cash proceeds from the sale of our Murray Hill and
Berkeley Heights facilities.
Cash Used in Financing Activities
Net cash used in financing activities was $101.6 million during the first
nine months of 2003, compared with net cash used in financing activities of
$103.4 million in the same period of 2002.
During the first nine months of 2003, we repurchased 1,756,611 shares for
$70.1 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 September 30, 2003, there was $29.9 million remaining under this program.
In addition, during the first nine months of 2003, we repurchased 1,267,689
shares of common stock for $51.2 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 $18.3
million for the nine months ended September 30, 2003.
In January 2002, we acquired 2.5 million shares in a privately-negotiated
block trade for $85.1 million. During the first nine months of 2002, we also
repurchased 756,100 of our shares for $29.1 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 is $10.0M for the
nine months ended September 30, 2002.
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 September 30, 2003.
Future Liquidity - Sources and Uses of Funds
Potential Payments in Settlement of Tax and Legal Matters
We and our predecessors are involved in certain tax and legal
proceedings, claims and litigation arising in the ordinary course of business.
These matters are at various stages of resolution, but could ultimately result
in cash payments in the amounts described in Note 7 - Contingencies above.
Share Repurchases and Dividends
During October 2002, we announced that our board of directors authorized
a share repurchase program of up to $100 million, funded with cash on hand and
future cash flow. This two-year program is in addition to our existing share
repurchase program to offset the dilutive effect of shares issued under employee
benefit plans. It is our intention to repurchase the remaining $30 million in
order to complete this program during 2003.
We have not paid cash dividends since we seperated from Moody's in 2000.
After considering all of the implications of the new U.S. tax laws regarding
deductibility of tax dividends, we have decided to continue our policy not to
pay dividends to shareholders in the foreseeable future.
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 invest in our database and maintain our reputation for providing reliable
data;
o develop and maintain a successful Web-based business model;
o develop new products;
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 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. In addition, the
Company's ability to repurchase shares is subject to market conditions,
including trading volume in the Company's stock. 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 September 30, 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
We evaluated the effectiveness of our disclosure controls and procedures
("Disclosure Controls") as of the end of the third quarter of 2003. This
evaluation ("Controls Evaluation") was done with the participation of 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 control over 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. A 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 our 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.
There were no changes in our Internal Controls that occurred during the
quarter covered by this report that have materially affected, or are reasonably
likely to materially affect, our Internal Controls.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Information in response to this Item is included in Note 7 - Contingencies on
Pages 9-14 in Part I, Item 1, of this Form 10-Q.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit 4.7 -Amended and Restated Credit Agreement dated as of September
5, 2003 among The Dun & Bradstreet Corporation, JPMorgan Chase Bank,
Citibank, N.A., Bank of Tokyo-Mitsubishi Trust Company, The Bank of New
York and The Northern Trust Company.
Exhibit 31(a) - Certification of Chief Executive Officer pursuant to
Rule 13a-14(a)/15(d)-14(a) of the Securities Exchange Act of 1934, as
amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
Exhibit 31(b) - Certification of Chief Financial Officer pursuant to
Rule 13a-14(a)/15(d)-14(a) of the Securities Exchange Act of 1934, as
amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
Exhibit 32(a) - Certification of Chief Executive Officer pursuant to 18
U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
Exhibit 32(b) - Certification of Chief Financial Officer pursuant to 18
U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
(b) Reports on Form 8-K:
During the third quarter of our fiscal year ending September 30,
2003, we furnished one report on Form 8-K. The Current Report on Form 8-K
was furnished on July 22, 2003 and covered Item 7. Financial Statements
and Exhibits and 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: November 6, 2003
By: /s/ SARA MATHEW
-------------------------------------------------
Sara Mathew
Senior Vice President and Chief Financial Officer
Date: November 6, 2003
By: /s/ MARY JANE RAYMOND
-------------------------------------------------
Mary Jane Raymond
Vice President and Corporate Controller