UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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Form 10-K
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Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the Fiscal Year Ended December 31, 2012
Commission file number 1-15967
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The Dun & Bradstreet Corporation
(Exact name of registrant as specified in its charter)
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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
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Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Name of each exchange on which registered | |
Common Stock, par value $0.01 per share | New York Stock Exchange | |
Preferred Share Purchase Rights | New York Stock Exchange | |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes x No o
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes o No x
Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer | ý | Accelerated filer | o | Non-accelerated filer | o | Smaller reporting company | o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
As of June 30, 2012, the aggregate market value of all shares of Common Stock of The Dun & Bradstreet Corporation outstanding and held by nonaffiliates* (based upon its closing transaction price on the New York Stock Exchange Composite Tape on June 30, 2012) was approximately $3.184 billion.
As of January 31, 2013, 40,873,622 shares of Common Stock of The Dun & Bradstreet Corporation were outstanding.
Documents Incorporated by Reference
Portions of the registrant's definitive proxy statement for use in connection with its annual meeting of shareholders, scheduled to be held on May 8, 2013 are incorporated into Part III of this Form 10-K.
* Calculated by excluding all shares held by executive officers and directors of the registrant. Such exclusions will not be deemed to be an admission that all such persons are “affiliates” of the registrant for purposes of federal securities laws.
INDEX
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Item 8. | ||
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Item 14. | ||
Item 15. | ||
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PART I
Item 1. | Business |
Overview
The Dun & Bradstreet Corporation (“D&B” or “we” or “our” or the “Company”) is the world's leading source of commercial information and insight on businesses, enabling customers to Decide with Confidence® for 171 years. Our global commercial database as of December 31, 2012 contained more than 220 million business records. The database is enhanced by our proprietary DUNSRight® Quality Process, which transforms commercial data into valuable insight which is the foundation of our global solutions that customers rely on to make critical business decisions.
D&B provides solution sets that meet a diverse set of customer needs globally. Customers use D&B Risk Management Solutions™ to mitigate credit and supplier risk, increase cash flow and drive increased profitability; D&B Sales & Marketing Solutions™ to provide data management capabilities that provide effective and cost efficient marketing solutions to increase revenue from new and existing customers; and D&B Internet Solutions® to convert prospects into clients by enabling business professionals to research companies, executives and industries. Effective January 1, 2013, we began managing and reporting our Internet Solutions business as part of our Traditional Sales & Marketing Solution set.
Our Aspiration and Our Strategy
D&B is a company committed to delivering Total Shareholder Return (“TSR”). To achieve this objective, we remain focused on three key drivers of TSR over time: revenue growth; margin expansion; and maintaining a disciplined approach to deploying our free cash flow. These have been the central drivers of our success, and they will remain the key areas of focus for us going forward. We continue to execute our strategy in the following ways:
• | First, we remain focused on the commercial marketplace and continuing to be the world's largest and best provider of insight about businesses. This is reflected in our aspiration, which is “To be the most trusted source of commercial insight so our customers can Decide with Confidence®.” D&B's global scope provides an unique platform with over 220 million commercial records that enable customers to leverage unique and actionable insights. |
• | Second, maintaining our fundamental competitive advantage in the marketplace (i.e., data quality), we will continue to improve our data quality (better coverage and accuracy) and provide new sources of insight. To accomplish this, we are continuing to invest in a new technology platform that is scalable and far more agile, and will allow us to more readily provide innovative new products so we can meet emerging customer demands faster, and at a much lower cost over time. In addition, D&B continues to invest in data and analytic capabilities that are focused on helping our customers manage risk and accurately identify market opportunities. |
• | Third, we will leverage our data assets to enhance our products and services within our solution sets. |
Our strategy relies on four core competitive advantages that support our commitment to driving TSR and our aspiration to be the most trusted source of commercial insight so our customers can Decide with Confidence®. These core competitive advantages include our:
• | Trusted Brand; |
• | DUNSRight Quality Process; |
• | Team Member Engagement; and |
• | Financial Flexibility. |
For the reasons described below, we believe that these core competitive advantages will continue to drive our growth and profitability going forward.
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Trusted Brand
The D&B® brand dates back to the founding of our company in 1841. We believe that the D&B brand is unique in the marketplace, standing for trust and confidence in commercial insight; our customers rely on D&B and the quality of our brand when they make critical business decisions. The Hoover's® brand is also very well respected within its customer segment and we will seek to further leverage both brands going forward.
DUNSRight Quality Process
DUNSRight is our proprietary quality process that powers all of our customer solution sets and serves as our key strategic differentiator as a commercial insight company.
The foundation of our DUNSRight Quality Process is Quality Assurance, which includes over 2,000 separate automated and manual checks to ensure that data meets our global quality standards.
In addition, our five DUNSRight Quality Drivers work sequentially to enhance the data and make it useful to our customers in making critical business decisions.
The process works as follows:
• | Global Data Collection brings together data from a variety of sources such as company trade data, banking information, court and legal filings, business registries, publications, telephone interviews, automated heuristics, and company financial statements, worldwide; |
• | We integrate the data into our database through our patented Entity Matching process, which produces a single, more accurate picture of each business using proprietary methods that consider sound, meaning, geographic location, and unique semantic capabilities for complex challenges such as Asian writing systems; |
• | We apply the D-U-N-S® Number as a unique and standardized means of identifying and tracking a business globally throughout every step in the life and activity of the business; |
• | We use Corporate Linkage to enable our customers to view their total risk or opportunity across related businesses through direct ownership and other relationships; and |
• | Finally, our Predictive Indicators use statistical techniques to rate a business's past performance, to inform how a business is likely to perform in the future or to describe endemic risk. |
Team Member Engagement
Our culture is focused on developing team members, because we believe that great leadership drives great results, improves customer satisfaction and increases TSR. To build such leadership, we have developed and deployed a consistent, principles-based leadership model throughout our Company.
Our leadership development process ensures that team members, which include our management and employees, performance goals and financial rewards are linked to our strategy. In addition, we link a significant component of the compensation of each of our senior leaders to our overall financial results. Our leadership development process also enables team members to receive ongoing feedback on their performance goals and on their leadership. All team members are expected to own their personal development, build on their leadership strengths and work on their areas requiring further development.
We have a talent assessment process that provides a framework to assess and improve skill levels and performance and acts as a tool to aid talent development and succession planning. We also administer an employee engagement survey that enables team members worldwide to provide feedback on areas that will improve their performance, drive customer satisfaction and evolve our culture.
Financial Flexibility
Financial Flexibility is an ongoing process that reallocates spending from low-growth or low-value activities to activities that create greater value for shareholders through enhanced revenue growth, improved profitability and/or quality improvements. We are committed through this process to examining how every dollar is spent and optimizing between variable and fixed costs to ensure flexibility in changes to our operating expense base as we make strategic choices. This enables us to continually and systematically identify improvement opportunities in terms of quality, cost and customer experience. In executing our Financial Flexibility process, we seek to improve, standardize, consolidate and automate our business functions.
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Segments
On January 1, 2012, we began managing and reporting our business through the following three segments (all prior periods have been reclassified to reflect the new segment structure):
• | North America (which consists of our operations in the United States (“U.S.”) and Canada); |
• | Asia Pacific (which primarily consists of our operations in Australia, Greater China, India and Asia Pacific Worldwide Network); and |
• | Europe and other International Markets (which primarily consists of our operations in the United Kingdom (“UK”), the Netherlands, Belgium, Latin America and our European Worldwide Network). |
The following table presents the contribution by segment to total revenue and core revenue (See Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations of this Annual Report on Form 10-K):
For the Years Ended December 31, | ||||||||
2012 | 2011 | 2010 | ||||||
Total Revenue: | ||||||||
North America | 74 | % | 71 | % | 75 | % | ||
Asia Pacific | 12 | % | 15 | % | 11 | % | ||
Europe and Other International Markets | 14 | % | 14 | % | 14 | % | ||
Core Revenue: | ||||||||
North America | 74 | % | 75 | % | 79 | % | ||
Asia Pacific | 11 | % | 10 | % | 6 | % | ||
Europe and Other International Markets | 15 | % | 15 | % | 15 | % | ||
During 2011, we managed and reported our business globally through the following three segments:
• | North America (which consisted of our operations in the U.S. and Canada); |
• | Asia Pacific (which primarily consisted of our operations in Australia, Japan, Greater China and India); and |
• | Europe and other International Markets (which primarily consisted of our operations in the UK, the Netherlands, Belgium, Latin America and our total Worldwide Network). |
Prior to January 1, 2011, we managed and reported our business globally through two segments:
• | North America (which consisted of our operations in the U.S. and Canada); and |
• | International (which consisted of our operations in Europe, Asia Pacific and Latin America). |
We conduct business internationally through our wholly-owned subsidiaries, majority-owned joint ventures, independent correspondents, strategic relationships through our D&B Worldwide Network® and minority equity investments. Since 2000, we have entered into strategic relationships with strong local players throughout the world that we do not control and who have become part of our D&B Worldwide Network, operating under commercial agreements. Our D&B Worldwide Network enables our customers globally to make business decisions with confidence, because we incorporate data from the members of the D&B Worldwide Network into our database that is subject to our DUNSRight Quality Assurance standards, and utilize it in our customer solutions. Our customers, therefore, have access to a more powerful database and global solution sets that they can rely on to make their business decisions.
In connection with our strategy, we may acquire or divest businesses, products and technologies from time-to-time. For example:
• | In 2010, we acquired a 100% equity interest in D&B Australia; |
• | In 2011, we acquired a 100% interest in MicroMarketing, a leading provider of direct and digital marketing services in China; |
• | In 2012, we permanently ceased the operations of our Shanghai Roadway D&B Marketing Services Co. Ltd. operations in China; |
• | In 2012, we completed the sale of our market research business in China; and |
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• | In 2012, we completed the sales in North America of Purisma Incorporated, AllBusiness.com, Inc. and a small supply management company. |
Segment data and other information for the years ended December 31, 2012, 2011 and 2010 are included in Note 14 to our consolidated financial statements included in Item 8. of this Annual Report on Form 10-K.
Our Customer Solutions and Services
Risk Management Solutions
Risk Management Solutions is our largest customer solution set, accounting for 63%, 61% and 60% of our total revenue for the years ended December 31, 2012, 2011 and 2010, respectively. Within this customer solution set, we offer traditional, value-added and supply management solutions. Our Traditional Risk Management Solutions, which primarily includes our core DNBi® product line, as well as reports from our database which are used primarily for making decisions about new credit applications, constituted 74% of our Risk Management Solutions revenue and 47% of our total revenue for the year ended December 31, 2012. Our Value-Added Risk Management Solutions, which constituted 20% of our Risk Management Solutions revenue and 12% of our total revenue for the year ended December 31, 2012, generally support automated decision-making and portfolio management through the use of scoring and integrated software solutions. Our Supply Management Solutions, which can help companies better understand the financial risk of their supply chain, constituted 6% of our Risk Management Solutions revenue and 4% of our total revenue for the year ended December 31, 2012. See Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations of this Annual Report on Form 10-K for a discussion of trends in this customer solutions set.
Effective January 1, 2013, we began managing and reporting our North America Risk Management Solutions business as:
• | DNBi subscription plans - interactive, customizable online application that offers our customers real time access to our most complete and up-to-date global DUNSRight information, comprehensive monitoring and portfolio analysis. DNBi subscription plans are contracts that allow customers' unlimited use. In these instances, we recognize revenue ratably over the term of the contract; |
• | Non-DNBi subscription plans - subscription contracts which provide increased access to our risk management reports and data to help customers increase their profitability while mitigating their risk. The non-DNBi subscription plans allow customers' unlimited use. In these instances, we recognize revenue ratably over the term of the contract; and |
• | Projects and other risk management solutions - all other revenue streams. This includes, for example, our Business Information Report, our Comprehensive Report, our International Report, and D&B Direct. |
Management believes that these measures provide further insight into our performance and the growth of our North America Risk Management Solutions revenue.
We will no longer report our Risk Management Solutions business on a traditional, value-added and supply management solutions basis for any segment.
Our Risk Management Solutions help customers increase cash flow and profitability while mitigating credit, operational and regulatory risks by helping them answer questions such as:
• | Should I extend credit to this new customer? |
• | What credit limit should I set? |
• | Will this customer pay me on time? |
• | How can I avoid supply chain disruption? |
• | How do I know whether I am in compliance with regulatory acts? |
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Our principal Risk Management Solutions are:
• | DNBi, our interactive, customizable online application that offers customers a subscription based real time access to our most complete and up-to-date global DUNSRight information, comprehensive monitoring and portfolio analysis. We are also focused on helping more customers protect their business from risk through additions of the following DNBi products: |
• | DNBi Corporate, offering flexible pricing options allowing credit departments of all sizes to get just the data and options they need; and |
• | Portfolio Risk Manager for DNBi, a module which allows DNBi users to create strategic “one -click” analytic reports to see risk and opportunity across their customer base; |
• | Various business information reports (e.g., our Business Information Report, our Comprehensive Report, and our International Report, etc.) that are consumed in a transactional manner across multiple platforms such as DNB.com; |
• | eRAM, our enterprise solution for large global and domestic customers for automated decisioning and portfolio analytics; and |
• | D&B Direct®, a Software Application Programming Interface ("API"), that enables data integration inside Enterprise applications such as ERP, and enables master data management. |
Certain solutions are available on a subscription pricing basis, including our DNBi subscription pricing plan. Our subscription pricing plans represent a larger portion of our revenue, provide increased access to our risk management reports and data to help customers increase their profitability while mitigating their risk.
Sales & Marketing Solutions
Sales & Marketing Solutions is our second-largest customer solution set, accounting for 29%, 26% and 26% of our total revenue, respectively, for each of the years ended December 31, 2012, 2011 and 2010. Within this customer solution set, we offer traditional and value-added solutions. Our Traditional Sales & Marketing Solutions generally consist of our marketing lists and labels used by our customers in their direct mail and marketing activities, our education business and our electronic licensing solutions. These solutions constituted 30% of our Sales & Marketing Solutions revenue and 9% of our total revenue for the year ended December 31, 2012. Effective January 1, 2013, we began managing and reporting our Internet Solutions business as part of our Traditional Sales & Marketing Solutions set.
Our Value-Added Sales & Marketing Solutions generally include decision-making and customer information management solutions, including data management solutions like Optimizer (our solution to cleanse, identify and enrich our customers' client portfolios) and products introduced as part of our Data-as-a-Service (or “DaaS”) Strategy, which integrates our data directly into the applications and platforms that our customers use every day. Customer Relationship Management (“CRM”) was our first area of focus, with D&B360®, which helps CRM customers manage their data, increase sales and improve customer engagement. The vision for DaaS is to make D&B's data available wherever and whenever our customers need it, thereby powering more effective business processes.
The Value-Added Sales & Marketing Solutions constituted 70% of Sales & Marketing Solutions revenue and 20% of our total revenue for the year ended December 31, 2012. See Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations of this Annual Report on Form 10-K for a discussion of trends in this customer solutions set.
Our Sales & Marketing Solutions help customers increase revenue from new and existing customers by helping them answer questions such as:
• | Who are my best customers? |
• | How can I find prospects that look like my best customers? |
• | How can I capture untapped opportunities with my existing customers? |
• | How can I allocate sales force resources to revenue growth potential? |
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Our principal Sales & Marketing Solutions are:
• | Our customer data integration solutions, which are solutions that cleanse, identify, link and enrich customer information with our DUNSRight Quality Process. Our D&B Optimizer™ solution, for example, uses our DUNSRight Quality Process to transform our customers' prospects and data into up-to-date, accurate and actionable commercial insight, enabling a single customer view across multiple systems and touchpoints, such as marketing and billing databases, and better enabling a customer to make sales and marketing decisions. |
• | Our marketing and prospecting solutions, which benefit from our DUNSRight Quality Process to enable our customers to create accurate and comprehensive marketing campaigns and identify highly actionable, targeted prospects in order to drive their growth. As an example, D&B360 integrates our data into third-party CRM applications providing industry, company and contact insight for salespeople to operate more effectively; and Market Insight, which provides a robust marketing analytics tool, that helps customers segment and understand existing customers, in order to more effectively create campaigns to cross-sell new business. |
Internet Solutions
Our Internet Solutions business provides highly organized, efficient and easy-to-use products that address the online sales and marketing needs of professionals and businesses, including information on companies, industries and executives.
Internet Solutions, primarily representing the results of our Hoover's business, accounted for 7%, 7% and 6% of our total revenue for each of the years ended December 31, 2012, 2011 and 2010 , respectively. See Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations of this Annual Report on Form 10-K for a discussion on trends in this customer solutions set.
Hoover's, primarily a prospecting tool, provides information on public and private companies, and on industries and executives, sales, marketing and research professionals worldwide to help customers convert prospects to clients faster by providing a workflow solution to answer questions such as:
• | How do I identify prospects and better prepare for sales calls? |
• | Who are the key senior-level decision makers? |
• | How does the prospect compare to others in their industry? |
Effective January 1, 2013, we began managing and reporting our Internet Solutions business as part of our Traditional Sales & Marketing Solutions set.
Our Sales Force
We rely primarily on our sales force of approximately 2,000 team members worldwide to sell our customers solutions, of which approximately 1,100 were in our North American business and 900 were in our international business as of December 31, 2012. Our sales force includes relationship managers and solution specialists who sell to our strategic and commercial customers, telesales teams, a team that sells to federal, state and local governments, and a team that sells to resellers of our solutions and our data. Our global sales force is also a source of competitive advantage, which allows us to effectively serve large, medium and small sized customers.
Our Customers
We believe that different sized customers have different needs and require different skill sets to service them. Accordingly, we are organized to effectively serve each of our large, medium and small sized customers. Our principal customers are banks and other credit and financial institutions, manufacturers, wholesalers, retailers, government agencies, insurance companies and telecommunication companies, as well as sales, marketing and business development professionals. None of our customers accounted for more than 10% of our 2012 total revenue or of the revenue of our North American, Asia Pacific or Europe and other International Markets segments. Accordingly, neither we nor any of our segments is dependent on a single customer, such that a loss of any one would have a material adverse effect on our consolidated annual results of operations or the annual results of any of our segments.
Competition
We are subject to highly competitive conditions in all aspects of our business. However, we believe no competitor offers our complete line of solutions or can match our global data and analytic capabilities including proprietary capabilities quality resulting from our DUNSRight Quality Process.
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In North America, we are a market leader in our Risk Management Solutions business in terms of revenue. We compete with our customers' own internal business practices by continually developing more efficient alternatives to our customers' risk management processes to capture more of their internal spend. We also directly compete with a broad range of companies, including consumer credit companies such as Equifax, Inc. (“Equifax”) and Experian Information Solutions, Inc. (“Experian”), which have traditionally offered primarily consumer information services, but also offer products that combine consumer information with business information as a tool to help customers make credit decisions with respect to small businesses.
We also compete in North America with a broad range of companies offering solutions similar to our Sales & Marketing Solutions. Our direct competitors in Sales & Marketing Solutions include companies such as Equifax and infoGROUP. In addition, we face competition in data services from our customers' own internal development and from data quality software solutions.
Outside the U.S., the competitive environment varies by region and country, and can be significantly impacted by the legislative actions of local governments.
In Europe, our direct competition is primarily local, such as Experian in the UK and Graydon in Belgium and the Netherlands. We believe that we offer superior solutions when compared to these competitors because of our DUNSRight Quality Process. In addition, the Sales & Marketing Solutions landscape is both localized and fragmented throughout Europe, where numerous local players of varying size compete for business.
In Asia, we face competition in our Risk Management Solutions business from a mix of local and global providers. For example, we compete with Sinotrust in China, which is majority-owned by Experian, with Veda in Australia and with Experian in India. In addition, as in Europe, the Sales & Marketing Solutions landscape throughout Asia is localized and fragmented.
We also face significant competition from the in-house operations of the businesses we seek as customers, other general and specialized credit reporting and business information services, and credit insurers. For example, in certain international markets, such as Europe, some credit insurers have identified the provision of credit information as an additional revenue stream. In addition, business information solutions and services are becoming more readily available, principally due to the expansion of the Internet, greater availability of public data and the emergence of new providers of business information solutions and services.
As discussed in “Our Aspiration and Our Strategy” above, we believe that our Trusted Brand, our analytic capabilities, our Team Member Engagement and our Financial Flexibility form a powerful competitive advantage.
Our ability to continue to compete effectively will be based on a number of factors, including our ability to:
• | Communicate and demonstrate to our customers the value of our existing and new products and services based upon our proprietary DUNSRight Quality Process and, as a result, improve customer satisfaction; |
• | Maintain and develop proprietary information and services such as analytics (e.g., scoring) and sources of data not publicly available; |
• | Leverage our technology to significantly improve our value proposition for customers in order to make D&B's data available wherever and whenever our customers need it, as well as our brand perception and the value of our D&B Worldwide Network®; |
• | Maintain those third-party relationships on whom we rely for data and certain operational services; and |
• | Attract and retain a high-performing workforce. |
Intellectual Property
We own and control various intellectual property rights, such as trade secrets, confidential information, trademarks, service marks, trade names, copyrights, patents and applications. These rights, in the aggregate, are of material importance to our business. We also believe that the D&B name and related trade names, marks and logos are of material importance to our business. We are licensed to use certain technology and other intellectual property rights owned and controlled by others, and other companies are licensed to use certain technology and other intellectual property rights owned and controlled by us. We consider our trademarks, service marks, databases, software, copyrights, patents, patent applications and other intellectual property to be proprietary, and we rely on a combination of statutory (e.g., copyright, trademark, trade secret, patent, etc.) and contract and liability safeguards for protection thereof throughout the world.
Unless the context indicates otherwise, the names of our branded solutions and services referred to in this Annual Report on Form 10-K are trademarks, service marks or registered trademarks or service marks owned by or licensed to us or one or more of our subsidiaries.
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We own patents and patent applications both in the U.S. and in other selected countries of importance to us. The patents and patent applications include claims which pertain to certain technologies which we have determined are proprietary and warrant patent protection. We believe that the protection of our innovative technology, especially technology pertaining to our proprietary DUNSRight Quality Process such as our proprietary methods for data curation and Identity Resolution, through the filing of patent applications is a prudent business strategy, and we will continue to seek to protect those assets for which we have expended substantial capital. Filing of these patent applications may or may not provide us with a dominant position in the fields of technology. However, these patents and/or patent applications may provide us with legal defenses should subsequent patents in these fields be issued to third parties and later asserted against us. Where appropriate, we may also consider asserting or cross-licensing our patents.
Employees
As of December 31, 2012, we employed approximately 4,600 team members worldwide, of which approximately 2,400 were in our North American segment and Corporate and approximately 2,200 were in our remaining segments. We believe that we have good relations with our employees. There are no unions in the North American segment. Works Councils and Trade Unions represent a portion of our employees in our European and Latin American operations.
Available Information
We are required to file annual, quarterly and current reports, proxy statements and other information with the Securities and Exchange Commission (“SEC”). Investors may read and copy any document that we file, including this Annual Report on Form 10-K, at the SEC's Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. Investors may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains an Internet site at www.sec.gov that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC, from which investors can electronically access our SEC filings.
We make available free of charge on or through our Internet site (www. dnb.com) our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, as soon as reasonably practicable after we electronically file such material with, or furnish the material to, the SEC. The information on our Internet site, on our Hoover's Internet site or on our related Internet sites is not, and shall not be deemed to be, a part of this Annual Report on Form 10-K or incorporated into any other filings we make with the SEC.
Organizational Background of Our Company
As used in this report, except where the context indicates otherwise, the terms “D&B,” “Company,” “we,” “us,” or “our” refer to The Dun & Bradstreet Corporation and our subsidiaries. We were incorporated in 2000 in the State of Delaware.
Item 1A. | Risk Factors |
Our business model is dependent upon third parties to provide data and certain operational services, the loss of which would materially impact our business and financial results.
We rely significantly on third parties to support our business model. For example:
• | We obtain much of the data that we use from third parties, including public record sources; |
• | We utilize single source providers in certain countries to support the needs of our customers around the globe and rely on members of our D&B Worldwide Network to provide local data in countries in which we do not directly operate; |
• | We have outsourced certain portions of our data acquisition, processing and delivery and customer service and call center processes; and |
• | We have also outsourced various functions, such as our data center operations, technology help desk and network management functions in the U.S. and the UK. |
If one or more data providers were to experience financial or operational difficulties or were to withdraw their data, cease making it available, be unable to make it available due to changing industry standards or government regulations, substantially increase the cost of their data, not adhere to our data quality standards, or be acquired by a competitor who would cause any of these disruptions to occur, our ability to provide solutions and services to our customers could be materially adversely impacted, which could have a material adverse effect on our business and financial results. Similarly, if one of our outsource
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providers, including third parties with whom we have strategic relationships, were to experience financial or operational difficulties, their services to us would suffer or they may no longer be able to provide services to us at all, having a material adverse effect on our business and financial results. We cannot be certain that we could replace our large third-party vendors in a timely manner or on terms commercially reasonable to us. If we change a significant outsource provider, an existing provider makes significant changes to the way it conducts its operations, or we seek to bring in-house certain services performed today by third parties, we may experience unexpected disruptions in the provision of our solutions, which could have a material adverse effect on our business and financial results.
Our business performance is dependent upon the effectiveness of our technology investments, the failure of which could materially impact our business and financial results.
We have and will continue to undertake significant investments in our technology infrastructure on an annual basis in order to continually strengthen our leading position in commercial data and improve our existing technology platform. We may fail to effectively invest such amounts, or we may invest significant amounts in technologies that do not ultimately assist us in achieving our strategic goals. We may also fail to maintain our technology infrastructure in a manner that allows us to readily meet our customers' needs. If we experience any of these or similar failures related to our technology investments, we will not achieve our expected revenue growth, or desired cost savings, and we could experience a significant competitive disadvantage in the marketplace, such as the inability to offer certain types of new services or to collect certain types of new data, which could have a material adverse effect on our business and financial results.
Our success depends in part on our ability to adapt our solutions to our customers' preferences. Advances in information technology and uncertain or changing economic conditions are changing the way our customers use and purchase business information. As a result, our customers are demanding both lower prices and more features from our solutions, such as decision-making tools like credit scores and electronic delivery formats, and are expecting real-time data provided in a manner relevant to them. If we do not successfully adapt our solutions to our customers' preferences, our business and financial results would be materially adversely affected. Specifically, for our larger customers, our continued success will be dependent on our ability to satisfy more of their needs by providing more breadth and depth of data and allowing them more flexibility to use our data through web services and third-party solutions. For our smaller customers, our success will depend in part on our ability to develop a strong value proposition, including simplifying our solutions and pricing offerings, to enhance our marketing efforts to these customers and to improve our service to them.
The failure to continue to invest in our business could result in a material adverse effect on our future financial results. Such investments may include: (i) our ability to successfully evolve our workforce away from those third parties who assisted us in the building of our technology, to internal employees who can successfully execute thereon; (ii) executing on, and mitigating risks associated with, new product offerings such as DaaS; and (iii) ensuring continued compatibility of our new platforms and technologies with our Worldwide Network partners and other affiliates.
Violations of the U.S. Foreign Corrupt Practices Act (“FCPA”), and similar laws, and the investigation of such matters, including the current investigations regarding violations of consumer data privacy laws in China, or, related investigations and compliance reviews that we may conduct from time-to-time, could have a material adverse effect on our business.
The FCPA and similar anti-bribery laws in other jurisdictions generally prohibit companies and their intermediaries from making improper payments to government officials and/or other persons for the purpose of obtaining or retaining business. Recent years have seen a substantial increase in anti-bribery law enforcement activity by U.S. regulators, with more frequent and aggressive investigations and enforcement proceedings by both the Department of Justice (“DOJ”) and the U.S. Securities and Exchange Commission (“SEC"), increased enforcement activity by non-U.S. regulators, and increases in criminal and civil proceedings brought against companies and individuals. Our policies mandate compliance with these anti-bribery laws. We may operate in many parts of the world that are recognized as having a greater potential for governmental and commercial corruption. We cannot assure that our policies and procedures will always protect us from reckless or criminal acts committed by our employees or third-party intermediaries. From time-to-time, we may conduct internal investigations and compliance reviews, the findings of which could negatively impact our business. Any determination that our operations or activities are not, or were not, in compliance with existing United States or foreign laws or regulations could result in the imposition of substantial fines, interruptions of business, loss of supplier, vendor or other third-party relationships, termination of necessary licenses and permits, and other legal or equitable sanctions. Other internal or government investigations or legal or regulatory proceedings, including lawsuits brought by private litigants, may also follow as a consequence. Violations of these laws may result in criminal or civil sanctions, which could disrupt our business and result in a material adverse effect on our reputation, business, results of operations or financial condition.
During 2012, we were assessed fines by a court in China relating to allegations that the data collection practices of our Shanghai Roadway D&B Marketing Services Co Ltd. (“Roadway”) operations in China may have violated local Chinese
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consumer data privacy laws. We permanently ceased the operations of Roadway during 2012. In addition, we have been reviewing certain allegations that we may have violated the FCPA and certain other laws in our China operations. As previously reported, we have voluntarily contacted the SEC and the DOJ to advise both agencies of our investigation. Our investigation remains ongoing and is being conducted at the direction of the Audit Committee.
We are presently unable to predict the duration, scope or result of the Audit Committee's investigation, of any investigations by the SEC, or the DOJ, or any other U.S. or foreign governmental authority, or whether any such authority will commence any additional legal action against us. The SEC and the DOJ have a broad range of civil and criminal sanctions available to them under the FCPA and other laws and regulations including, but not limited to, injunctive relief, disgorgement, fines, penalties, modifications to business practices, including the termination or modification of existing business relationships, and the imposition of compliance programs and the retention of a monitor to oversee compliance with the FCPA. The imposition of any of these sanctions or remedial measures could have a material adverse effect on our reputation, business, results of operations or financial condition.
We face competition that may cause price reductions or loss of market share.
We are subject to competitive conditions in all aspects of our business. We compete directly with a broad range of companies offering business information services to customers. We also face competition from:
• | The in-house operations of the businesses we seek as customers; |
• | Other general and specialized credit reporting and other business information providers; and |
• | Credit insurers. |
Business information solutions and services are becoming more readily available, principally due to the expansion of the Internet, greater availability of public data and the emergence of new providers of business information solutions and services. Large Internet companies can provide low-cost alternatives to data gathering and change how our customers perform key activities such as marketing campaigns, or collect information on customers, suppliers and competitors. Such companies, and other third parties which may not be readily apparent today, may become significant low-cost or no-cost competitors and adversely impact the demand for our solutions and services, or limit our growth potential.
Weak economic conditions can result in customers seeking to utilize free or lower-cost information that is available from alternative sources such as the Internet and European Commission-sponsored projects like the European Business Register. Intense competition could adversely impact us by causing, among other things, price reductions, reduced gross margins and loss of market share.
We face competition outside the U.S., and our competitors could develop an alternative to our D&B Worldwide Network.
We face competition from consumer credit companies that offer consumer information solutions to help their customers make credit decisions regarding small businesses. Consumer information companies are seeking to expand their operations more broadly into aspects of the business information space. While their presence is currently small in the business information market, given the size of the consumer market in which they operate, they have scale advantages in terms of scope of operations and size of relationship with customers, which they can potentially leverage to an advantage.
Our ability to continue to compete effectively will be based upon a number of factors, including our ability to:
• | Communicate and demonstrate to our customers the value of our products and services based upon our proprietary DUNSRight Quality Process and, as a result, improve customer satisfaction; |
• | Maintain and develop proprietary information and services such as analytics (e.g., scoring), and sources of data not publicly available, such as detailed trade data; |
• | Demonstrate value through our decision-making tools and integration capabilities; |
• | Leverage our brand perception and the value of our D&B Worldwide Network; |
• | Continue to implement the Financial Flexibility component of our strategy and effectively reallocate our spending; |
• | Obtain and deliver reliable and high-quality business and professional contact information through various media and distribution channels in formats tailored to customer requirements; |
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• | Adopt and maintain an effective information technology infrastructure to support product delivery as customer needs and preferences change and competitors offer more sophisticated products; |
• | Attract and retain a high-performance workforce; |
• | Enhance our existing services and introduce new services; |
• | Enter new customer markets; and |
• | Improve our international business model and data quality through the successful relationship with members of our D&B Worldwide Network and through our undertaking of acquisitions or entering into joint ventures or similar relationships. |
Our business performance might not be sufficient for us to meet the full-year financial guidance that we provide publicly.
We provide full-year financial guidance to the public which is based upon our assumptions regarding our expected financial performance. This includes, for example, assumptions regarding our ability to grow revenue, to grow operating income, to achieve desired tax rates and to generate cash. We believe that our financial guidance provides investors and analysts with a better understanding of our view of our near-term financial performance. Such financial guidance may not always be accurate, due to our inability to meet the assumptions we make and the impact on our financial performance that could occur as a result of the various risks and uncertainties to our business as set forth in these risk factors and in our public filings with the SEC or otherwise. If we fail to meet the full-year financial guidance that we provide or if we find it necessary to revise such guidance as we conduct our operations throughout the year, the market value of our common stock or other securities could be materially adversely affected.
We may lose key business assets or suffer interruptions in product delivery, including loss of data center capacity or the interruption of telecommunications links, the Internet, or power sources which could significantly impede our ability to do business.
Our operations depend on our ability, as well as that of third-party service providers to whom we have outsourced several critical functions, to protect data centers and related technology against damage from hardware failure, fire, power loss, telecommunications failure, impacts of terrorism, breaches in security (such as the actions of computer hackers), the theft of services, natural disasters, or other disasters. The online services we provide are dependent on links to telecommunications providers. We generate a significant amount of our revenue through telesales centers and Internet sites that we use in the acquisition of new customers, fulfillment of solutions and services and responding to customer inquiries. We may not have sufficient redundant operations or change management processes in connection with our introduction of new online products or services to prevent a loss or failure in all of these areas in a timely manner. Any damage to, or failure by our service providers to properly maintain our data centers, failure of our telecommunications links or inability to access these telesales centers or Internet sites could cause interruptions in operations that adversely affect our ability to meet our customers' requirements and materially adversely affect our business and financial results.
A failure in the integrity of our database could harm our brand and result in a loss of sales and an increase in legal claims.
The reliability of our solutions is dependent upon the integrity of the data in our global database. We have in the past been subject to customer and third-party complaints and lawsuits regarding our data, which have occasionally been resolved by the payment of money damages. A failure in the integrity of our database, whether inadvertently or through the actions of a third party, which may be on the rise, could harm us by exposing us to customer or third-party claims or by causing a loss of customer confidence in our solutions. We may experience an increase in risks to the integrity of our database as we move toward real time data feeds, including those from social media sources. We must continue to invest in our database to improve and maintain the quality, timeliness and coverage of the data contained therein if we are to maintain our competitive positioning in the marketplace.
We have licensed, and we may license in the future, proprietary rights to third parties. While we attempt to ensure that the quality of our brand is maintained by the third parties to whom we grant such licenses and by customers, they may take actions that could materially adversely affect the value of our proprietary rights or our reputation. It cannot be assured that these licensees and customers will take the same steps we have taken to prevent misappropriation of our data solutions or technologies.
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Cybersecurity risks could harm our operations, the operations of our critical outsourcers, or the operations of our partners on whom we rely for data and to meet our customer needs, any of which could materially impact our business and financial results.
We rely upon the security of our information technology infrastructure to protect us from cyber attacks and unauthorized access. Cyber attacks can include malware, computer viruses, or other significant disruption of our Information Technology (“IT”) networks and related systems. Government agencies and security experts have warned about growing risks of hackers, cyber-criminals and other potential attacks targeting every type of IT system. We may face increasing cyber security risks, as we receive data from new sources, such as social media sites or through data aggregators who provide us with information.
If we experience a problem with the functioning of an important IT system or a security breach of our IT systems, the resulting disruptions could have a material adverse effect on our business. We also store sensitive information in connection with our human resources operations and other aspects of our business which could be compromised by a cyber attack. To the extent that any disruptions or security breach results in a loss or damage to our data, an inappropriate disclosure of confidential information, an inability to access data sources, or an inability to process data for or send data to our customers, it could cause significant damage to our reputation, affect our relationships with our customers, lead to claims against the Company and ultimately harm our business. We may be required to incur significant costs to protect against damage caused by these disruptions or security breaches in the future. While we have insurance coverage for certain instances of a cyber security breach, our coverage may not be sufficient if we suffer a significant or multiple attacks.
Our outsourcing partners are primarily responsible for the security of our IT environment and we rely significantly on third parties to supply clean data content and to resell our products in a secure manner. All of these third parties face risks relating to cyber security similar to ours which could disrupt their businesses and therefore materially impact ours. While we provide guidance and specific requirements in some cases, we do not directly control any of such parties' IT security operations, or the amount of investment they place in guarding against cyber security threats. Accordingly, we are subject to any flaw in or breaches to their IT systems or those that they operate for us, which could materially impact our business, operations and financial results.
Our brand and reputation are key assets and competitive advantages of our Company and our business may be affected by how we are perceived in the marketplace.
Our brand and its attributes are key assets of the Company. Our ability to attract and retain customers is highly dependent upon the external perceptions of our level of data quality, effective provision of services, business practices, including actions of our employees, third-party providers and members of the D&B Worldwide Network, that are not consistent with D&B's policies and standards, and overall financial condition. Negative perceptions or publicity regarding these matters could damage our reputation with customers and the public, which could make it difficult for us to attract and maintain customers. Adverse developments with respect to our industry may also, by association, negatively impact our reputation, or result in higher regulatory or legislative scrutiny. Although we monitor developments for areas of potential risk to our reputation and brand, negative perceptions or publicity could have a material adverse effect on our business and financial results.
We rely on annual contract renewals for a substantial part of our revenue, and our quarterly results may be significantly impacted by the timing of these renewals, including from various government institutions, a shift in product mix that results in a change in the timing of revenue recognition or a significant decrease in government spending.
We derive a substantial portion of our revenue from annual customer contracts, including from various government institutions. If we are unable to renew a significant number of these contracts, our revenue and results of operations would be harmed. In addition, our results of operations from period-to-period may vary due to the timing of customer contract renewals. As contracts are renewed, we have experienced, and may continue to experience, a shift in product mix underlying such contracts. This could result in the deferral of increased amounts of revenue into future periods as a larger portion of revenue is recognized over the term of our contracts rather than upfront at contract signing or the acceleration of deferred revenue into an earlier reporting period. Although this may cause our financial results from period-to-period to vary substantially, such change in revenue recognition would not change the total revenue recognized over the life of our contracts. A reduction in government spending on our products could, however, have a material adverse impact on our business. We derive a portion of our revenue from direct and indirect sales to U.S., state, local and foreign governments and their respective agencies and our competitors are increasingly targeting such governmental agencies as potential customers. Such contracts are subject to various procurement laws and regulations, and contract provisions in our government contracts could result in the imposition of various civil and criminal penalties, termination of contracts, forfeiture of profits, suspension of payments, or suspension of future government contracting. In addition, governments continue to struggle with sustained debt and social obligations, and efforts to balance government deficits could result in lower spend by the government with D&B. If we were to lose one or more government customers to our competitors, or our government contracts are not renewed or are terminated, or we are suspended from government work, or our ability to compete for new contracts is adversely affected, our business would suffer.
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We may be adversely affected by the global economic environment and the evolving standards of emerging markets in which we operate.
We operate in both emerging and mature global markets. As a result of the macro-economic challenges currently affecting the economy of the United States, Europe, and other parts of the world, our customers or vendors may experience problems with their earnings, cash flow, or both. This may cause our customers to delay, cancel or significantly decrease their purchases from us, and we may experience delays in payment or their inability to pay amounts owed to us. Tepid economic growth is also intensifying the competitive pressures in our business categories including increasing price pressure. In addition, our vendors may substantially increase their prices to us and without notice. Any such change in the behavior of our customers or vendors may materially adversely affect our earnings and cash flow. In addition, as we continue to compete in a greater number of emerging markets, potential customers may show a significant preference to local vendors. Our ability to compete in emerging markets depends on our ability to provide products in a manner that is sufficiently flexible to meet local needs, and to continue to undertake technological advances in local markets in a cost effective manner, utilizing local labor forces. If economic conditions in the United States and other key markets deteriorate further or do not show improvement, or we are not able to successfully compete in emerging markets, we may experience material adverse impacts to our business, operating results, and/or access to credit markets.
Changes in the legislative, regulatory and commercial environments in which we operate could adversely impact our ability to collect, compile, use and publish data and could impact our financial results.
Certain types of information we collect, compile, use and publish are subject to regulation by governmental authorities in various jurisdictions in which we operate, particularly in our international markets. There is increasing awareness and concern among the general public, governmental bodies, and others regarding marketing and privacy matters, particularly as they relate to individual privacy interests and the ubiquity of the Internet. These concerns may result in new or amended laws and regulations that could adversely impact our business. Future laws and regulations with respect to the collection, compilation, use and publication of information, and adverse publicity or litigation concerning the commercial use of such information could result in limitations being imposed on our operations, increased compliance or litigation costs and/or loss of revenue, which could have a material adverse effect on our business and financial results.
Our business relies on the availability of the Internet as it is currently configured and operated both to obtain data and services and to provide data and services to our customers. If the rules governing the operation of the Internet and/or transfer of information over the internet were to change, such as, for example, by permitting broadband suppliers to discriminate in providing access to their networks, this could have a material adverse impact on our business.
Governmental agencies may seek to increase the costs we must pay to acquire, use and/or redistribute data that such governmental agencies collect. In addition, as more federal, state, and foreign governments continue to struggle with significant fiscal pressure, we may be faced with changes to tax laws that could have immediate negative consequences to our business. While we would seek to pass along any such price increases or tax impacts to our customers or provide alternative services, there is no guarantee that we would be able to do so, given competitive pressures or other considerations. Should our proportion of multiyear contracts increase, our risk of having to incur such additional costs further increases. Any such price increases or alternative services may result in reduced usage by our customers and/or loss of market share, which could have a material adverse effect on our business and financial results. In addition, governmental agencies may seek to limit or restrict access to data and information that are currently publicly available, which could have a material adverse impact on our business.
Acquisitions, joint ventures or similar strategic relationships may disrupt or otherwise have a material adverse effect on our business and financial results.
As part of our strategy, we may seek to acquire other complementary businesses, products and technologies or enter into joint ventures or similar strategic relationships. These transactions are subject to the following risks:
• | Acquisitions, joint ventures or similar relationships may cause a disruption in our ongoing business, distract our management and make it difficult to maintain our standards, controls and procedures; |
• | We may not be able to integrate successfully the services, content, products and personnel of any such transaction into our operations; |
• | We may not derive the revenue improvements, cost savings and other intended benefits of any such transaction; and |
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• | There may be risks, exposures and liabilities of acquired entities or other third parties with whom we undertake a transaction, that may arise from such third parties' activities prior to undertaking a transaction with us. |
While we have certain contractual commitments with each of the third-party members of the D&B Worldwide Network, we have no direct management control over such third parties or other third parties who conduct business under the D&B brand name in local markets or who license and sell under the D&B name and the renewal by third-party members of the D&B Worldwide Network of their agreements with D&B is subject to mutual agreement.
The D&B Worldwide Network is comprised of wholly-owned subsidiaries, joint ventures that we either control or hold a minority interest in, and third-party members who conduct business under the D&B brand name in local markets. While third-party member participation in the D&B Worldwide Network and certain of our relationships with other third parties are controlled by commercial services agreements and the use of our trademarks is controlled by license agreements, we have no direct management control over these members or third parties beyond the terms of the agreements. We license data to and from certain third parties to be included in the data solutions that they sell to their customers and that we sell to our customers, respectively, and such arrangements may increase as a percentage of our total revenue in the future. We do not have direct control over such third parties' sales people or practices, and their failure to successfully sell products which include our data will impact the revenue we receive and could have a material adverse effect on our business and financial results. As a result, actions or inactions taken by these third parties or their failure to renew their contractual relationship with us may have a material impact on our business and financial results. For example, one or more third parties or members may:
• | Provide a product or service that does not adhere to our data quality standards; |
• | Fail to comply with D&B brand and communication standards or behave in a manner that tarnishes our brand; |
• | Engage in illegal or unethical business or marketing practices; |
• | Elect not to support new or revised products and services or other strategic initiatives; |
• | Fail to execute subsequent agreements to remain a part of the D&B Worldwide Network on terms and conditions |
that are mutually agreeable to D&B, upon the expiration of their existing agreements;
• | Fail to execute other data or distribution contract requirements; or |
• | Refuse to provide new sources of data. |
Such actions or inactions may have an impact on customer confidence in the D&B brand globally, which could materially adversely impact our business and financial results.
Our international businesses are subject to various risks associated with operations in foreign countries, which could materially adversely affect our business and financial results.
Our success depends in part on our various international businesses. For the three years ended December 31, 2012, 2011 and 2010, our businesses outside of North America accounted for 26%, 29% and 25% of total revenue, respectively. Our international businesses are subject to many of the same challenges as our domestic business, as well as the following:
• | Our competition is primarily local, and our customers may have greater loyalty to our local competitors which may have a competitive advantage because they are not restricted by U.S. and international laws with which we require our international businesses to comply, such as the FCPA; |
• | While our services have not usually been regulated, governments, particularly in emerging market areas, may adopt legislation or regulations, or we may learn that our current methods of operation violate existing legislation or regulations, governing the collection, compilation, use and/or publication of the kinds of information we collect, compile, use and publish, which could bar or impede our ability to operate and this could adversely impact our business; |
• | Credit insurance is a significant credit risk mitigation tool in certain markets that may reduce the demand for our Risk Management Solutions; and |
• | In some markets, key data elements are generally available from public-sector sources, thus reducing a customer's need to purchase that data from us. |
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In addition, the FCPA and anti-bribery and anti-corruption laws in other jurisdictions generally prohibit improper payments to government officials or other persons for the purpose of obtaining or retaining business. We cannot assure you that our policies and procedures will always protect us from acts committed by our employees or third party intermediaries. From time-to-time, under appropriate circumstances, we have undertaken and will continue to undertake investigations of the relevant facts and circumstances and, when appropriate, take remedial actions, which can be expensive and require significant time and attention from senior management. Violations of these laws may result in criminal or civil sanctions, which could disrupt our business and result in a material adverse effect on our business and financial results.
Our international strategy includes the leveraging of our D&B Worldwide Network to improve our data quality. We form and manage strategic relationships to create a competitive advantage for us over the long term; however, these strategic relationships may not be successful or may be subject to ownership change.
The issue of data privacy is an increasingly important area of public policy in various international markets, and we operate in an evolving regulatory environment. If our existing business practices were deemed to violate existing data privacy laws or such laws as they may evolve from time-to-time, our business or the business of third parties on whom we depend could be adversely impacted.
Our operating results could be negatively affected by a variety of other factors affecting our foreign operations, many of which are beyond our control. These factors may include currency fluctuations, economic, political or regulatory conditions, competition from government agencies in a specific country or region, trade protection measures and other regulatory requirements. Additional risks inherent in international business activities generally include, among others:
• | Longer accounts receivable payment cycles; |
• | The costs and difficulties of managing international operations and strategic alliances, including the D&B Worldwide Network; |
• | The costs and difficulties of enforcing agreements, collecting receivables and protecting assets, especially our intellectual property rights, in non-U.S. legal systems; and |
• | The need to comply with a broader array of regulatory and licensing requirements, the failure of which could result in fines, penalties or business suspensions. |
We may not be able to attract and retain qualified personnel, including members of our sales force and technology team, which could impact the quality of our performance and customer satisfaction.
Our success and financial results depend on our continuing ability to attract, retain and motivate highly qualified personnel at all levels and to appropriately use the time and resources of such individuals. This includes members of our sales force on whom we rely for generating the vast majority of our revenue, and members of our technology team on whom we rely to continually maintain and upgrade all of our technology operations and to maintain and develop our products. Competition for these individuals is intense, and we may not be able to retain our key personnel or key members of our sales or technology teams, or attract, assimilate or retain other highly-qualified individuals in the future. We have from time-to-time experienced, and we expect to continue to experience, difficulty in hiring and retaining employees, including members of our sales force and technology team, who have appropriate qualifications.
We may be unable to reduce our expense base through our Financial Flexibility, and the related reinvestments from savings from this program may not produce revenue growth which would materially adversely affect our business and financial results.
Successful execution of our strategy includes reducing our expense base through our Financial Flexibility initiatives, and reallocating our expense base reductions into initiatives to produce revenue growth. The success of this program may be affected by:
• | Our ability to continually adapt and improve our organizational design and efficiency to meet the changing needs of our business and our customers; |
• | Our ability to implement the actions required under this program within the established time frame; |
• | Our ability to implement actions that require process or technology changes to reduce our expense base; |
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• | Our ability to enter into or amend agreements with third-party vendors to obtain terms beneficial to us; |
• | Managing third-party vendor relationships effectively; |
• | Completing agreements with our local works councils and trade unions related to potential reengineering actions in certain International markets; and |
• | Maintaining quality around key business processes utilizing our reduced and/or outsourced resources. |
If we fail to reduce our expense base, or if we do not achieve revenue growth from new initiatives, our business and financial results would be materially adversely affected.
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Our retirement and post retirement pension plans are subject to financial market risks that could adversely affect our future results of operations and cash flow.
We have significant retirement and post retirement pension plan assets and funding obligations. The performance of the financial and capital markets impact our plan expenses and funding obligations. Significant decreases in market interest rates, decreases in the fair value of plan assets and investment losses on plan assets will increase our funding obligations, and adversely impact our results of operations and cash flows.
We are involved in legal proceedings that could have a material adverse impact on us.
We are involved in legal proceedings, claims and litigation that arise in the ordinary course of business. As discussed in greater detail under “Note 13. Contingencies” in “Notes to Consolidated Financial Statements” in Part II, Item 8. of this Annual Report on Form 10-K, certain of these matters could materially adversely affect our business and financial results.
Item 1B. | Unresolved Staff Comments |
Not applicable.
Item 2. | Properties |
Our corporate office is located at 103 JFK Parkway, Short Hills, New Jersey 07078, in a 123,000-square-foot property that we lease. We renewed our lease on this property in 2011 for a term of eight years, with two five-year renewal options. This property also serves as the executive offices of our North American segment.
Our other properties are geographically distributed to meet sales and operating requirements worldwide. We generally consider these properties to be both suitable and adequate to meet current operating requirements. As of December 31, 2012, the most important of these other properties include the following sites:
• | A 178,000 square-foot leased office building in Center Valley, Pennsylvania, which houses various sales, finance, fulfillment and data acquisition personnel; |
• | A 147,000 square-foot office building that we own in Parsippany, New Jersey, housing personnel from our North American sales, marketing and technology groups (approximately one-third of this building is leased to a third party); |
• | A 79,060 square-foot leased space in Marlow, England, which houses our UK business, International technology and certain other International teams; |
• | A 78,000 square-foot leased office building in Austin, Texas, housing technology development, certain product development and sales operations; |
• | A 59,000 square-foot leased office space in Australia, housing our Australian sales, marketing and technology groups; and |
• | A 47,782 square-foot leased space in Dublin, Ireland, housing technology development, data operations and sales operations. |
In addition to the above locations, we also conduct operations in other offices across the globe, most of which are leased.
Item 3. | Legal Proceedings |
Information in response to this Item is included in Part II, Item 8. “Note 13. Contingencies” and is incorporated by reference into Part I of this Annual Report on Form 10-K.
Item 4. | Mine Safety Disclosures |
Not applicable.
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PART II
Item 5. | Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities |
Our common stock is listed on the New York Stock Exchange and trades under the symbol DNB. We had 2,038 shareholders of record as of December 31, 2012.
The following table summarizes the high and low sales prices for our common stock, as reported in the periods shown:
2012 | 2011 | ||||||||||||||
High | Low | High | Low | ||||||||||||
First Quarter | $ | 86.50 | $ | 75.17 | $ | 86.45 | $ | 76.98 | |||||||
Second Quarter | $ | 85.50 | $ | 63.34 | $ | 83.33 | $ | 74.25 | |||||||
Third Quarter | $ | 84.36 | $ | 68.62 | $ | 76.79 | $ | 61.06 | |||||||
Fourth Quarter | $ | 83.68 | $ | 73.21 | $ | 74.83 | $ | 59.25 | |||||||
We paid quarterly dividends to our shareholders totaling $69.0 million, $70.4 million and $70.0 million during the years ended December 31, 2012, 2011 and 2010, respectively. In February 2013, we declared a dividend of $0.40 per share for the first quarter of 2013. This cash dividend will be payable on March 14, 2013 to shareholders of record at the close of business on February 27, 2013.
Issuer Purchases of Equity Securities
The following table provides information about purchases made by us or on our behalf during the quarter ended December 31, 2012 of shares of equity that are registered pursuant to Section 12 of the Exchange Act:
Period | Total Number of Shares Purchased (a)(b) | Average Price Paid Per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (a)(b) | Maximum Number of Currently Authorized Shares That May Yet Be Purchased Under the Plans or Programs (a) | Approximate Dollar Value of Currently Authorized Shares That May Yet Be Purchased Under the Plans or Programs (b) | |||||||||||
(Dollar amounts in millions, except share data) | ||||||||||||||||
October 1 - 31, 2012 | 548,291 | $ | 80.96 | 548,291 | — | $ | — | |||||||||
November 1 - 30, 2012 | 1,713,479 | $ | 77.95 | 1,713,479 | — | $ | — | |||||||||
December 1 - 31, 2012 | 1,111,421 | $ | 80.97 | 1,111,421 | — | $ | — | |||||||||
3,373,191 | $ | 79.44 | 3,373,191 | 3,821,520 | $ | 490.1 | ||||||||||
(a) | During the three months ended December 31, 2012, we repurchased 294,483 shares of common stock for $23.9 million under our Board of Directors approved repurchase program to mitigate the dilutive effect of the shares issued under our stock incentive plans and Employee Stock Purchase Plan. This program was announced in May 2010 and expires in October 2014. The maximum amount authorized under the program is 5,000,000 shares, of which 1,178,480 shares have been repurchased as of December 31, 2012. We anticipate that this program will be completed by October 2014. |
(b) | In August 2012, our Board of Directors approved a $500 million increase to our then-existing $500 million share repurchase program, for a total program authorization of $1 billion. During the three months ended December 31, 2012, we repurchased 3,078,708 shares of common stock for $244.1 million under this share repurchase program. We anticipate that this program will be completed by mid-2014. |
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FINANCIAL PERFORMANCE COMPARISON GRAPH*
SINCE DECEMBER 31, 2007
In accordance with SEC rules, the graph below compares the Company’s cumulative total shareholder return against the cumulative total return of the Standard & Poor’s 500 Index and a published industry index starting on December 31, 2007. Our past performance may not be indicative of future performance.
As an industry index, the Company chose the S&P 500 Commercial & Professional Services Index, a subset of the S&P 500 Index that includes companies that provide business-to-business services.
COMPARISON OF FIVE-YEAR CUMULATIVE TOTAL RETURN
AMONG D&B, S&P 500 INDEX AND THE S&P 500 COMMERCIAL &
PROFESSIONAL SERVICES INDEX
* | Assumes $100 invested on December 31, 2007, and reinvestment of dividends. |
21
Item 6. Selected Financial Data
For the Years Ended December 31, | |||||||||||||||||||
2012 | 2011 | 2010 | 2009 | 2008 | |||||||||||||||
(Amounts in millions, except per share data) | |||||||||||||||||||
Results of Operations: | |||||||||||||||||||
Revenue | $ | 1,663.0 | $ | 1,758.5 | $ | 1,676.6 | $ | 1,687.0 | $ | 1,726.3 | |||||||||
Costs and Expenses | 1,230.9 | 1,333.7 | 1,267.5 | 1,222.5 | 1,256.6 | ||||||||||||||
Operating Income (1) | 432.1 | 424.8 | 409.1 | 464.5 | 469.7 | ||||||||||||||
Non-Operating Income (Expense) - Net (2) | (53.8 | ) | (56.7 | ) | (21.2 | ) | (32.0 | ) | (30.8 | ) | |||||||||
Income from Continuing Operations Before Provision for Income Taxes and Equity in Net Income of Affiliates | 378.3 | 368.1 | 387.9 | 432.5 | 438.9 | ||||||||||||||
Provision for Income Taxes (3) | 83.1 | 109.2 | 137.9 | 112.1 | 128.0 | ||||||||||||||
Equity in Net Income of Affiliates | 1.3 | 1.3 | 0.9 | 1.6 | 1.0 | ||||||||||||||
Income from Continuing Operations | 296.5 | 260.2 | 250.9 | 322.0 | 311.9 | ||||||||||||||
Income from Discontinued Operations, Net of Income Taxes | — | — | — | — | 0.7 | ||||||||||||||
Gain on Disposal of Italian Real Estate Business, Net of Tax Impact | — | — | — | — | 0.4 | ||||||||||||||
Income from Discontinued Operations, Net of Income Taxes (4) | — | — | — | — | 1.1 | ||||||||||||||
Net Income | 296.5 | 260.2 | 250.9 | 322.0 | 313.0 | ||||||||||||||
Less: Net (Income) Loss Attributable to the Noncontrolling Interest | (1.0 | ) | 0.1 | 1.2 | (2.6 | ) | (2.4 | ) | |||||||||||
Net Income Attributable to D&B | $ | 295.5 | $ | 260.3 | $ | 252.1 | $ | 319.4 | $ | 310.6 | |||||||||
Basic Earnings Per Share of Common Stock: | |||||||||||||||||||
Income from Continuing Operations Attributable to D&B Common Shareholders | $ | 6.47 | $ | 5.31 | $ | 5.03 | $ | 6.06 | $ | 5.65 | |||||||||
Income from Discontinued Operations Attributable to D&B Common Shareholders | — | — | — | — | 0.02 | ||||||||||||||
Net Income Attributable to D&B Common Shareholders | $ | 6.47 | $ | 5.31 | $ | 5.03 | $ | 6.06 | $ | 5.67 | |||||||||
Diluted Earnings Per Share of Common Stock: | |||||||||||||||||||
Income from Continuing Operations Attributable to D&B Common Shareholders | $ | 6.43 | $ | 5.28 | $ | 4.98 | $ | 5.99 | $ | 5.56 | |||||||||
Income from Discontinued Operations Attributable to D&B Common Shareholders | — | — | — | — | 0.02 | ||||||||||||||
Net Income Attributable to D&B Common Shareholders | $ | 6.43 | $ | 5.28 | $ | 4.98 | $ | 5.99 | $ | 5.58 | |||||||||
Other Data: | |||||||||||||||||||
Weighted Average Number of Shares Outstanding - Basic | 45.6 | 48.9 | 49.9 | 52.3 | 54.4 | ||||||||||||||
Weighted Average Number of Shares - Diluted | 46.0 | 49.3 | 50.4 | 52.9 | 55.3 | ||||||||||||||
Amounts Attributable to D&B Common Shareholders | |||||||||||||||||||
Income from Continuing Operations, Net of Income Taxes | $ | 295.5 | $ | 260.3 | $ | 252.1 | $ | 319.4 | $ | 309.5 | |||||||||
Income from Discontinued Operations, Net of Income Taxes | — | — | — | — | 1.1 | ||||||||||||||
Net Income Attributable to D&B | $ | 295.5 | $ | 260.3 | $ | 252.1 | $ | 319.4 | $ | 310.6 | |||||||||
Cash Dividends Paid per Common Share | $ | 1.52 | $ | 1.44 | $ | 1.40 | $ | 1.36 | $ | 1.20 | |||||||||
Cash Dividends Declared per Common Share | $ | 1.52 | $ | 1.44 | $ | 1.40 | $ | 1.36 | $ | 0.90 | |||||||||
Other Comprehensive Income, Net of Tax | |||||||||||||||||||
Net Income | $ | 296.5 | $ | 260.2 | $ | 250.9 | $ | 322.0 | $ | 313.0 | |||||||||
Foreign Currency Translation Adjustments, no Tax Impact | 17.1 | (7.5 | ) | (0.3 | ) | 43.2 | (70.8 | ) | |||||||||||
Defined Benefit Pension Plans: | |||||||||||||||||||
Prior Service Costs, Net of Tax Income (Expense) (5) | (6.4 | ) | (5.8 | ) | 0.9 | 18.1 | (3.8 | ) | |||||||||||
Net Loss, Net of Tax Income (Expense) (6) | (56.2 | ) | (116.6 | ) | (1.4 | ) | (28.5 | ) | (287.3 | ) | |||||||||
Derivative Financial Instruments, Net of Income Tax (Expense) (7) | 0.1 | 3.0 | — | 0.5 | (5.4 | ) | |||||||||||||
Comprehensive Income, Net of Tax | 251.1 | 133.3 | 250.1 | 355.3 | (54.3 | ) | |||||||||||||
Less: Comprehensive Income (Loss) Attributable to the Noncontrolling Interest | (1.0 | ) | 1.4 | 0.8 | (2.9 | ) | (2.9 | ) | |||||||||||
Comprehensive Income (Loss) Attributable to D&B | $ | 250.1 | $ | 134.7 | $ | 250.9 | $ | 352.4 | $ | (57.2 | ) | ||||||||
Balance Sheet: | |||||||||||||||||||
Total Assets | $ | 1,991.8 | $ | 1,977.1 | $ | 1,919.5 | $ | 1,763.4 | $ | 1,586.0 | |||||||||
Long-Term Debt | $ | 1,290.7 | $ | 963.9 | $ | 972.0 | $ | 961.8 | $ | 904.3 | |||||||||
Total D&B Shareholders' Equity (Deficit) | $ | (1,017.4 | ) | $ | (743.9 | ) | $ | (677.6 | ) | $ | (769.0 | ) | $ | (856.7 | ) | ||||
Noncontrolling Interest | $ | 3.1 | $ | 3.7 | $ | 8.8 | $ | 11.7 | $ | 6.1 | |||||||||
Total Equity (Deficit) | $ | (1,014.3 | ) | $ | (740.2 | ) | $ | (668.8 | ) | $ | (757.3 | ) | $ | (850.6 | ) | ||||
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(1) | Non-core gain and (charges) (a) included in Operating Income: |
For the Years Ended December 31, | |||||||||||||||||||
Gain (Charge): | 2012 | 2011 | 2010 | 2009 | 2008 | ||||||||||||||
Restructuring Charges | $ | (29.4 | ) | $ | (22.1 | ) | $ | (14.8 | ) | $ | (23.1 | ) | $ | (31.4 | ) | ||||
Legal Fees and Other Shut-Down Costs Associated with Matters in China | $ | (15.6 | ) | $ | — | $ | — | $ | — | $ | — | ||||||||
Impairments Related to Matters in China | $ | (12.9 | ) | $ | — | $ | — | $ | — | $ | — | ||||||||
Impaired Intangible Assets | $ | — | $ | (3.3 | ) | $ | (20.4 | ) | $ | (3.0 | ) | $ | — | ||||||
Strategic Technology Investment or MaxCV | $ | (30.3 | ) | $ | (44.8 | ) | $ | (36.5 | ) | $ | — | $ | — | ||||||
Settlement of Legacy Pension Obligation | $ | — | $ | (5.1 | ) | $ | — | $ | — | $ | — | ||||||||
(a) | See Item 7. included in this Annual Report on Form 10-K for definition of non-core gains and (charges). |
(2) | Non-core gains and (charges) (a) included in Non-Operating Income (Expense) – Net: |
For the Years Ended December 31, | |||||||||||||||||||
Gain (Charge): | 2012 | 2011 | 2010 | 2009 | 2008 | ||||||||||||||
Effect of Legacy Tax Matters | $ | (14.8 | ) | $ | (7.1 | ) | $ | (0.4 | ) | $ | 1.0 | $ | 1.2 | ||||||
Gain (Loss) on Sale of Businesses | $ | 6.1 | $ | — | $ | — | $ | — | $ | — | |||||||||
Strategic Technology Investment or MaxCV | $ | — | $ | — | $ | 0.3 | $ | — | $ | — | |||||||||
Gain on Disposal of North American Self Awareness Solutions business | $ | — | $ | — | $ | 23.1 | $ | — | $ | — | |||||||||
Gain (Loss) on Sale of Investment | $ | — | $ | (11.4 | ) | $ | — | $ | — | $ | — | ||||||||
One-Time Gain on Hedge of Purchase Price of Australian Acquisition | $ | — | $ | — | $ | 3.4 | $ | — | $ | — | |||||||||
Gain Associated with Beijing D&B HuiCong Market Research Co., Ltd Joint Venture | $ | — | $ | — | $ | — | $ | — | $ | 0.6 | |||||||||
Settlement of Legacy Tax Matter Arbitration | $ | — | $ | — | $ | — | $ | 4.1 | $ | 8.1 | |||||||||
Gain on Disposal of Italian Domestic Business | $ | — | $ | — | $ | — | $ | 6.5 | $ | — | |||||||||
Tax Reserve true-up for the Settlement of the 2003 tax year, related to the "Amortization and Royalty Expense Deductions" transaction – as discussed in our previous SEC filings | $ | — | $ | — | $ | — | $ | — | $ | (7.7 | ) | ||||||||
(a) | See Item 7. included in this Annual Report on Form 10-K for definition of non-core gains and (charges). |
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(3) | Non-core gains and (charges) (a) included in Provision for Income Taxes: |
For the Years Ended December 31, | |||||||||||||||||||
Tax Benefit (Cost): | 2012 | 2011 | 2010 | 2009 | 2008 | ||||||||||||||
Restructuring Charges | $ | 10.7 | $ | 7.9 | $ | 5.2 | $ | 8.4 | $ | 11.2 | |||||||||
Legal Fees and Other Shut-Down Costs Associated with China | $ | 5.2 | $ | — | $ | — | $ | — | $ | — | |||||||||
Gain (Loss) on Sale of Businesses | $ | 5.1 | $ | — | $ | — | $ | — | $ | — | |||||||||
Impaired Intangible Assets | $ | — | $ | 1.2 | $ | 7.6 | $ | 1.2 | $ | — | |||||||||
Strategic Technology Investment or MaxCV | $ | 9.5 | $ | 10.5 | $ | 8.3 | $ | — | $ | — | |||||||||
Settlement of Legacy Pension Obligation | $ | — | $ | 1.9 | $ | — | $ | — | $ | — | |||||||||
Gain (Loss) on Investment | $ | — | $ | 3.5 | $ | — | $ | — | $ | — | |||||||||
Tax Benefit on a Loss on the Tax Basis of a Legal Entity | $ | 15.4 | $ | 8.5 | $ | — | $ | — | $ | — | |||||||||
Gain on Disposal of North American Self Awareness Solutions Business | $ | — | $ | — | $ | (9.0 | ) | $ | — | $ | — | ||||||||
One-Time Gain on Hedge of Purchase Price of Australian Acquisition | $ | — | $ | — | $ | (1.3 | ) | $ | — | $ | — | ||||||||
Reduction of a Deferred Tax Asset Resulting from the Healthcare Act of 2010 | $ | — | $ | — | $ | (13.0 | ) | $ | — | $ | — | ||||||||
Gain Associated with Beijing D&B HuiCong Market Research Co., Ltd Joint Venture | $ | — | $ | — | $ | — | $ | — | $ | (0.1 | ) | ||||||||
Effect of Legacy Tax Matters | $ | 27.8 | $ | 12.0 | $ | 13.3 | $ | (1.0 | ) | $ | (1.2 | ) | |||||||
Settlement of Legacy Tax Matter Arbitration | $ | — | $ | — | $ | — | $ | (3.1 | ) | $ | (3.1 | ) | |||||||
Benefits Derived From Worldwide Legal Entity Simplification | $ | — | $ | — | $ | — | $ | 36.2 | $ | — | |||||||||
Gain on Disposal of Italian Domestic Business | $ | — | $ | — | $ | — | $ | 3.5 | $ | — | |||||||||
Favorable Resolution of Global Tax Audits including the Liquidation of Dormant International Corporations and/or Divested Entities | $ | — | $ | — | $ | — | $ | — | $ | 22.7 | |||||||||
Interest on IRS Deposit | $ | — | $ | — | $ | — | $ | — | $ | 1.3 | |||||||||
Tax Reserve true-up for the Settlement of the 2003 tax year, related to the "Amortization and Royalty Expense Deductions" transaction – as discussed in our previous SEC filings | $ | — | $ | — | $ | — | $ | — | $ | 15.4 | |||||||||
(a) | See Item 7. included in this Annual Report on Form 10-K for definition of non-core gains and (charges). |
(4) | On December 27, 2007, we sold our Italian real estate business for $9.0 million, which was a part of our International segment, and we have reclassified the historical financial results of the Italian real estate business as discontinued operations. We have reflected the results of this business as discontinued operations in the consolidated statements of earnings for all periods presented as set forth in this Annual Report on Form 10-K. We have recorded the resulting gain of $0.4 million (both pre-tax and after-tax) from the sale in the first quarter of 2008 in the consolidated statement of operations and comprehensive income. |
(5) Net of Tax Income (Expense) of $3.1 million, $3.8 million, $(7.8) million, $(4.0) million and $2.5 million during the years ended December 31, 2012, 2011, 2010, 2009 and 2008, respectively.
(6) | Net of Tax Income (Expense) of $27.2 million, $76.6 million, $15.2 million, $6.3 million and $184.4 million during the years ended December 31, 2012, 2011, 2010, 2009 and 2008, respectively. |
(7) Net of Tax Income (Expense) of $(1.9) million for the year ended December 31, 2012 and $3.4 million for the year ended December 31, 2008. No tax impact for the years ended December 31, 2011, 2010 or 2009.
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Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
How We Manage Our Business
For internal management purposes, we refer to “core revenue,” which we calculate as total operating revenue less the revenue of divested and other businesses. Core revenue is used to manage and evaluate the performance of our segments and to allocate resources because this measure provides an indication of the underlying changes in revenue in a single performance measure. Core revenue does not include reported revenue of divested and other businesses since they are not included in future revenue.
During the year ended December 31, 2012, we completed (a) the sale of: (i) the domestic portion of our Japanese operations to Tokyo Shoko Research Ltd. (“TSR Ltd.”); (ii) our market research business in China, consisting of two joint venture companies; and (iii) a research and advisory services business in India; and (b) the shut-down of our Shanghai Roadway D&B Marketing Service Co. Ltd. (“Roadway”) business. These businesses have been classified as “Divested and Other Businesses.” These Divested and Other Businesses contributed 10%, 39% and 51% to our Asia Pacific total revenue for the years ended December 31, 2012, 2011 and 2010, respectively. See Note 14 and Note 17 to our consolidated financial statements included in Item 8. of this Annual Report on Form 10-K for further detail.
During the year ended December 31, 2012, we also completed the sale of: (i) AllBusiness.com, Inc.; (ii) Purisma Incorporated; and (iii) a small supply management company. These businesses have been classified as “Divested and Other Businesses.” These Divested and Other Businesses contributed 1% and 4% to our North America total revenue for the years ended December 31, 2011 and 2010, respectively. See Note 14 and Note 17 to our consolidated financial statements included in Item 8. of this Annual Report on Form 10-K for further detail.
We also isolate the effects of changes in foreign exchange rates on our revenue growth because we believe it is useful for investors to be able to compare revenue from one period to another, both with and without the effects of foreign exchange. The change in our operating performance attributable to foreign currency rates is determined by converting both our prior and current periods by a constant rate. As a result, we monitor our core revenue growth both after and before the effects of foreign exchange. Core revenue growth excludes the effects of foreign exchange.
From time-to-time we have analyzed and we may continue to further analyze core revenue growth before the effects of foreign exchange among two components, “organic core revenue growth” and “core revenue growth from acquisitions.” We analyze “organic core revenue growth” and “core revenue growth from acquisitions” because management believes this information provides an important insight into the underlying health of our business. Core revenue includes the revenue from acquired businesses from the date of acquisition.
We evaluate the performance of our business segments based on segment revenue growth before the effects of foreign exchange, and segment operating income growth before certain types of gains and charges that we consider do not reflect our underlying business performance. Specifically, for management reporting purposes, we evaluate business segment performance “before non-core gains and charges” because such charges are not a component of our ongoing income or expenses and/or may have a disproportionate positive or negative impact on the results of our ongoing underlying business operations. A recurring component of non-core gains and charges are our restructuring charges, which result from a foundational element of our growth strategy that we refer to as Financial Flexibility. Through Financial Flexibility, management identifies opportunities to improve the performance of the business in terms of reallocating our spending from low-growth or low-value activities to activities that will create greater value for shareholders through enhanced revenue growth, improved profitability and/or quality improvements. Management is committed through this process to examining our spending, and optimizing between variable and fixed costs to ensure flexibility in changes to our operating expense base as we make strategic choices. This enables us to continually and systematically identify improvement opportunities in terms of quality, cost and customer experience. Such charges are variable from period-to-period based upon actions identified and taken during each period. Management reviews operating results before such non-core gains and charges on a monthly basis and establishes internal budgets and forecasts based upon such measures. Management further establishes annual and long-term compensation such as salaries, target cash bonuses and target equity compensation amounts based on performance before non-core gains and charges and a significant percentage weight is placed upon performance before non-core gains and charges in determining whether performance objectives have been achieved. Management believes that by eliminating non-core gains and charges from such financial measures, and by being overt to shareholders about the results of our operations excluding such charges, business leaders are provided incentives to recommend and execute actions that are in the best long-term interests of our shareholders, rather than being influenced by the potential impact a charge in a particular period could have on their compensation. See Note 14 to our consolidated financial statements included in Item 8. of this Annual Report on Form 10-K for financial information regarding our segments.
25
Similarly, when we evaluate the performance of our business as a whole, we focus on results (such as operating income, operating income growth, operating margin, net income, tax rate and diluted earnings per share) before non-core gains and charges because such non-core gains and charges are not a component of our ongoing income or expenses and/or may have a disproportionate positive or negative impact on the results of our ongoing underlying business operations and may drive behavior that does not ultimately maximize shareholder value. It may be concluded from our presentation of non-core gains and charges that the items that result in non-core gains and charges may re-occur in the future.
We monitor free cash flow as a measure of our business. We define free cash flow as net cash provided by operating activities minus capital expenditures and additions to computer software and other intangibles. Free cash flow measures our available cash flow for potential debt repayment, acquisitions, stock repurchases, dividend payments and additions to cash, cash equivalents and short-term investments. We believe free cash flow to be relevant and useful to our investors as this measure is used by our management in evaluating the funding available after supporting our ongoing business operations and our portfolio of product investments.
Free cash flow should not be considered as a substitute measure for, or superior to, net cash flows provided by operating activities, investing activities or financing activities. Therefore, we believe it is important to view free cash flow as a complement to our consolidated statements of cash flows.
In addition, we evaluate our North America Risk Management Solutions based on two metrics: (1) “subscription,” and “non-subscription,” and (2) “DNBi® ” and “non-DNBi.” We define “subscription” as contracts that allow customers’ unlimited use. In these instances, we recognize revenue ratably over the term of the contract, which is generally one year and “non-subscription” as all other revenue streams. We define “DNBi” as our interactive, customizable online application that offers our customers real time access to our most complete and up-to-date global DUNSRight information, comprehensive monitoring and portfolio analysis and “non-DNBi” as all other revenue streams. Management believes these measures provide further insight into our performance and growth of our North America Risk Management Solutions revenue.
Effective January 1, 2013, we began managing and reporting our North America Risk Management Solutions business as:
• | DNBi subscription plans - interactive, customizable online application that offers our customers real time access to our most complete and up-to-date global DUNSRight information, comprehensive monitoring and portfolio analysis. DNBi subscription plans are contracts that allow customers' unlimited use. In these instances, we recognize revenue ratably over the term of the contract; |
• | Non-DNBi subscription plans - subscription contracts which provide increased access to our risk management reports and data to help customers increase their profitability while mitigating their risk. The non-DNBi subscription plans allow customers' unlimited use. In these instances, we recognize revenue ratably over the term of the contract; and |
• | Projects and other risk management solutions - all other revenue streams. This includes, for example, our Business Information Report, our Comprehensive Report, our International Report, and D&B Direct. |
Management believes that these measures provide further insight into our performance and the growth of our North America Risk Management Solutions revenue.
We will no longer report our Risk Management Solutions business on a traditional, value-added and supply management solutions basis for any segment.
The adjustments discussed herein to our results as determined under generally accepted accounting principles in the United States of America (“GAAP”) are among the primary indicators management uses as a basis for our planning and forecasting of future periods, to allocate resources, to evaluate business performance and, as noted above, for compensation purposes. However, these financial measures (e.g., results before non-core gains and charges and free cash flow) are not prepared in accordance with GAAP, and should not be considered in isolation or as a substitute for total revenue, operating income, operating income growth, operating margin, net income, tax rate, diluted earnings per share, or net cash provided by operating activities, investing activities and financing activities prepared in accordance with GAAP. In addition, it should be noted that because not all companies calculate these financial measures similarly, or at all, the presentation of these financial measures is not likely to be comparable to measures of other companies.
See “Results of Operations” below for a discussion of our results reported on a GAAP basis.
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Overview
On January 1, 2012, we began managing and reporting our business through the following three segments (all prior periods have been reclassified to reflect the new segment structure):
• | North America (which consists of our operations in the U.S. and Canada); |
• | Asia Pacific (which primarily consists of our operations in Australia, Greater China, India and Asia Pacific Worldwide Network); and |
• | Europe and Other International Markets (which primarily consists of our operations in the UK, the Netherlands, Belgium, Latin America and European Worldwide Network). |
During 2011, we managed and reported our business globally through the following three segments:
• | North America (which consisted of our operations in the U.S. and Canada); |
• | Asia Pacific (which primarily consisted of our operations in Australia, Japan, Greater China and India); and |
• | Europe and Other International Markets (which primarily consisted of our operations in the UK, the Netherlands, Belgium, Latin America and our total Worldwide Network). |
Prior to January 1, 2011, we managed and reported our business globally through two segments:
• | North America (which consisted of our operations in the U.S. and Canada); and |
• | International (which consisted of our operations in Europe, Asia Pacific and Latin America). |
The financial statements of our subsidiaries outside North America reflect a fiscal year ended November 30 to facilitate the timely reporting of our consolidated financial results and consolidated financial position.
The following table presents the contribution by segment to total revenue and core revenue:
For the Years Ended December 31, | ||||||||
2012 | 2011 | 2010 | ||||||
Total Revenue: | ||||||||
North America | 74 | % | 71 | % | 75 | % | ||
Asia Pacific | 12 | % | 15 | % | 11 | % | ||
Europe and Other International Markets | 14 | % | 14 | % | 14 | % | ||
Core Revenue: | ||||||||
North America | 74 | % | 75 | % | 79 | % | ||
Asia Pacific | 11 | % | 10 | % | 6 | % | ||
Europe and Other International Markets | 15 | % | 15 | % | 15 | % | ||
The following table presents contributions by customer solution set to total revenue and core revenue:
For the Years Ended December 31, | ||||||||
2012 | 2011 | 2010 | ||||||
Total Revenue by Customer Solution Set (1): | ||||||||
Risk Management Solutions | 63 | % | 61 | % | 60 | % | ||
Sales & Marketing Solutions | 29 | % | 26 | % | 26 | % | ||
Internet Solutions | 7 | % | 7 | % | 6 | % | ||
Core Revenue by Customer Solution Set: | ||||||||
Risk Management Solutions | 64 | % | 65 | % | 65 | % | ||
Sales & Marketing Solutions | 29 | % | 28 | % | 28 | % | ||
Internet Solutions | 7 | % | 7 | % | 7 | % | ||
27
(1) | Our Divested and Other Businesses contributed 1%, 6%, and 8% to our total consolidated revenue for the years ended December 31, 2012, 2011 and 2010. See Note 14 and Note 17 to our consolidated financial statements included in Item 8. of this Annual Report on Form 10-K for further detail. |
Our customer solution sets are discussed in greater detail in “Item 1. Business” of this Annual Report on Form 10-K.
Within our Risk Management Solutions, we monitor the performance of our “Traditional” products, our “Value-Added” products and our “Supply Management” products. Within our Sales & Marketing Solutions, we monitor the performance of our “Traditional” products and our “Value-Added” products.
Effective January 1, 2013, we began managing and reporting our North America Risk Management Solutions business as:
• | DNBi subscription plans - interactive, customizable online application that offers our customers real time access to our most complete and up-to-date global DUNSRight information, comprehensive monitoring and portfolio analysis. DNBi subscription plans are contracts that allow customers' unlimited use. In these instances, we recognize revenue ratably over the term of the contract; |
• | Non-DNBi subscription plans - subscription contracts which provide increased access to our risk management reports and data to help customers increase their profitability while mitigating their risk. The non-DNBi subscription plans allow customers' unlimited use. In these instances, we recognize revenue ratably over the term of the contract; and |
• | Projects and other risk management solutions - all other revenue streams. This includes, for example, our Business Information Report, our Comprehensive Report, our International Report, and D&B Direct. |
Management believes that these measures provide further insight into our performance and the growth of our North America Risk Management Solutions revenue.
We will no longer report our Risk Management Solutions business on a traditional, value-added and supply management solutions basis for any segment.
Also, effective January 1, 2013, we began managing and reporting our Internet Solutions business as part of our Traditional Sales & Marketing Solutions set.
Risk Management Solutions
Our Traditional Risk Management Solutions include our core DNBi® product line as well as reports from our database which are used primarily for making decisions about new credit applications. Our Traditional Risk Management Solutions constituted the following percentages of total Risk Management Solutions Revenue, Total Revenue and Core Revenue:
For the Years Ended December 31, | ||||||||
2012 | 2011 | 2010 | ||||||
Risk Management Solutions Revenue | 74 | % | 73 | % | 73 | % | ||
Total Revenue | 47 | % | 45 | % | 43 | % | ||
Core Revenue | 47 | % | 48 | % | 47 | % | ||
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 the following percentages of total Risk Management Solutions Revenue, Total Revenue and Core Revenue:
For the Years Ended December 31, | ||||||||
2012 | 2011 | 2010 | ||||||
Risk Management Solutions Revenue | 20 | % | 20 | % | 21 | % | ||
Total Revenue | 12 | % | 12 | % | 13 | % | ||
Core Revenue | 13 | % | 13 | % | 14 | % | ||
28
Our Supply Management Solutions can help companies better understand the financial risk of their supply chain. Our Supply Management Solutions constituted the following percentages of total Risk Management Solutions Revenue, Total Revenue and Core Revenue:
For the Years Ended December 31, | ||||||||
2012 | 2011 | 2010 | ||||||
Risk Management Solutions Revenue | 6 | % | 7 | % | 6 | % | ||
Total Revenue | 4 | % | 4 | % | 4 | % | ||
Core Revenue | 4 | % | 4 | % | 4 | % | ||
Sales & Marketing Solutions
Our Traditional Sales & Marketing Solutions generally consist of our marketing lists and labels used by customers in their direct mail and marketing activities, our education business and our electronic licensing solutions. Our Traditional Sales & Marketing Solutions constituted the following percentages of total Sales & Marketing Solutions Revenue, Total Revenue and Core Revenue:
For the Years Ended December 31, | ||||||||
2012 | 2011 | 2010 | ||||||
Sales & Marketing Solutions Revenue | 30 | % | 33 | % | 37 | % | ||
Total Revenue | 9 | % | 9 | % | 10 | % | ||
Core Revenue | 9 | % | 9 | % | 10 | % | ||
Our Value-Added Sales & Marketing Solutions generally include decision-making and customer information management solutions, including data management solutions like Optimizer (our solution to cleanse, identify and enrich our customers' client portfolios) and products introduced as part of our Data-as-a-Service (or “DaaS”) Strategy, which integrates our data directly into the applications and platforms that our customers use every day. Customer Relationship Management (“CRM”) was our first area of focus, with D&B360, which helps CRM customers manage their data, increase sales and improve customer engagement. The vision for DaaS is to make D&B's data available wherever and whenever our customers need it, thereby powering more effective business processes. Our Value-Added Sales & Marketing Solutions constituted the following percentages of total Sales & Marketing Solutions Revenue, Total Revenue and Core Revenue:
For the Years Ended December 31, | ||||||||
2012 | 2011 | 2010 | ||||||
Sales & Marketing Solutions Revenue | 70 | % | 67 | % | 63 | % | ||
Total Revenue | 20 | % | 17 | % | 16 | % | ||
Core Revenue | 20 | % | 19 | % | 18 | % | ||
Critical Accounting Policies and Estimates
In preparing our consolidated financial statements and accounting for the underlying transactions and balances reflected therein, we have applied the significant accounting policies described in Note 1 to our consolidated financial statements included in Item 8. of this Annual Report on Form 10-K. Of those policies, we consider the policies described below to be critical because they are both most important to the portrayal of our financial condition and results, and they require management’s subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. We base our estimates on historical experience and on various other factors that we believe to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions.
If actual results in a given period ultimately differ from previous estimates, the actual results could have a material impact on such period.
We have discussed the selection and application of our critical accounting policies and estimates with the Audit Committee of our Board of Directors, and the Audit Committee has reviewed the disclosure regarding critical accounting policies and estimates as well as the other sections in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
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Pension and Postretirement Benefit Obligations
Through June 30, 2007, we offered to substantially all of our U.S. based employees coverage under a defined benefit plan called The Dun & Bradstreet Corporation Retirement Account (“U.S. Qualified Plan”). The U.S. Qualified Plan covered active and retired employees. The benefits to be paid upon retirement are based on a percentage of the employee's annual compensation. The percentage of compensation allocated annually to a retirement account ranged from 3% to 12.5% based on age and years of service. Amounts allocated under the U.S. Qualified Plan also receive interest credits based on the 30-year Treasury rate or equivalent rate published by the Internal Revenue Service. Pension costs are determined actuarially and funded in accordance with the Internal Revenue Code. During 2010 in conjunction with a determination letter review, we updated certain portions of the U.S. Qualified Plan's cash balance pay credit scale, along with the minimum interest crediting rate, retroactive to January 1, 1997, to ensure that the plan complies with the accrual rules in the Internal Revenue Code. We received a favorable determination letter for the U.S. Qualified Plan in October 2010 in conjunction with these changes.
We also maintain supplemental and excess plans in the United States (“U.S. Non-Qualified Plans”) to provide additional retirement benefits to certain key employees of the Company. These plans are unfunded, pay-as-you-go plans. The U.S. Qualified Plan and the U.S. Non-Qualified Plans account for approximately 72% and 14% of our pension obligation, respectively, at December 31, 2012. Effective June 30, 2007, we amended the U.S. Qualified Plan and one of the U.S. Non-Qualified Plans, known as the U.S. Pension Benefit Equalization Plan (the “PBEP”). Any pension benefit that had been accrued through such date under the two plans was “frozen” at its then current value and no additional benefits will accrue under the U.S. Qualified Plan and the PBEP, other than interest on such amounts. Our employees in certain of our international operations are also provided with retirement benefits through defined benefit plans, representing the remaining balance of our pension obligations.
We also provide various health care for retirees. U.S. based employees, hired before January 1, 2004, who retire with 10 years of vesting service after age 45, are eligible to receive benefits. Postretirement benefit costs and obligations are determined actuarially. During the first quarter of 2010, we eliminated company-paid life insurance benefits for retirees and modified our sharing of the Retiree Drug Subsidy with retirees that we are projected to receive. Effective July 1, 2010, we elected to convert the current prescription drug program for retirees over 65 to a group-based company sponsored Medicare Part D program, or Employer Group Waiver Plan (“EGWP”). Under this change, beginning in 2013, we will use the Part D subsidies delivered through the EGWP each year to reduce net company retiree medical costs until net company costs are completely eliminated. At that time, the Part D subsidies will be shared with retirees going forward to reduce retiree contributions.
The key assumptions used in the measurement of the pension and postretirement obligations and net periodic pension and postretirement cost are:
• | Expected long – term rate of return on pension plan assets-which is based on a target asset allocation as well as expected returns on asset categories of plan investments; |
• | Discount rate – which is used to measure the present value of pension plan obligations and postretirement health care obligations. The discount rates are derived using a yield curve approach which matches projected plan benefit payment streams with bond portfolios, reflecting actual liability duration unique to our plans; |
• | Rates of compensation increase and cash balance accumulation/conversion rates – which are based on an evaluation of internal plans and external market indicators; and |
• | Health care cost trends – which are based on historical cost data, the near-term outlook and an assessment of likely long-term trends. |
We believe that the assumptions used are appropriate, though changes in these assumptions would affect our pension and other postretirement benefit costs. The factor with the most immediate impact on our consolidated financial statements is a change in the expected long-term rate of return on pension plan assets for the U.S. Qualified Plan. For 2013, we will use an expected long-term rate of return of 7.75%. This assumption was 7.75% in 2012 and 8.25% in each of the years 2011 and 2010. The 7.75% assumption represents our best estimate of the expected long-term future investment performance of the U.S. Qualified Plan, after considering expectations for future capital market returns and the plan's asset allocation. As of December 31, 2012, the U.S. Qualified Plan was 52% invested in publicly-traded equity securities, 45% invested in debt securities and 3% invested in real estate investments. One-quarter-percentage-point increase or decrease in the long-term rate of return increases or reduces our annual operating income by approximately $3 million by reducing or increasing our net periodic pension cost.
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Changes in the discount rate, rate of compensation increase and cash balance accumulation/conversion rates also have an effect on our annual operating income. Based on the factors noted above, the discount rate is adjusted at each remeasurement date while other assumptions are reviewed annually. For our U.S. plans, one-quarter-percentage-point increase or decrease in the discount rate increases or decreases our pension cost by approximately $0.1 million and $0.3 million, respectively. The discount rate used to determine pension cost for our U.S. pension plans was 4.05%, 5.06% and 5.72% for 2012, 2011 and 2010, respectively. For 2013, we decreased the discount rate to 3.54% from 4.05% for all our U.S. pension plans.
Differences between the assumptions stated above and actual experience could affect our pension and other postretirement benefit costs. When actual plan experience differs from the assumptions used, actuarial gains or losses arise. These gains and losses are aggregated and amortized generally over the average future service periods or life expectancy of plan participants to the extent that such gains or losses exceed a “corridor.” The purpose of the corridor is to reduce the volatility caused by the difference between actual experience and the pension-related assumptions noted above, on a plan-by-plan basis. For all of our pension plans, total actuarial losses that have not been recognized in our pension costs as of December 31, 2012 and 2011 were $1,171.6 million and $1,093.8 million, respectively, of which $913.3 million and $879.9 million, respectively, were attributable to the U.S. Qualified Plan, $127.9 million and $120.2 million, respectively, were attributable to the U.S. Non-Qualified Plans, and the remainder was attributable to the non-U.S. pension plans. See discussion in Note 10 to our consolidated financial statements included in Item 8. of this Annual Report on Form 10-K. We expect to recognize a portion of such losses in our 2013 net periodic pension cost of $32.8 million, $7.2 million and $3.8 million for the U.S. Qualified Plan, U.S. Non-Qualified Plans and non-U.S. plans, respectively, compared to $26.6 million, $6.7 million and $2.3 million, respectively, in 2012. The higher amortization of actuarial loss in 2013 for the U.S. Qualified plan, which will be included in our pension cost in 2013, is primarily due to a lower discount rate and higher unrecognized actuarial loss subject to amortization in 2013 resulting from investment losses from 2008.
Differences between the expected long-term rate of return assumption and actual experience could affect our net periodic pension cost. For our pension plans, we recorded net periodic pension cost of $17.7 million, $7.1 million and $5.8 million for the years ended December 31, 2012, 2011 and 2010, respectively. A major component of the net periodic pension cost is the expected return on plan assets, which was $99.3 million, $110.4 million and $113.4 million for the years ended December 31, 2012, 2011 and 2010, respectively. The expected return on plan assets was determined by multiplying the expected long-term rate of return assumption by the market-related value of plan assets. The market-related value of plan assets recognizes asset gains and losses over five years to reduce the effects of short-term market fluctuations on net periodic cost. For our pension plans we recorded: (i) for the year ended December 31, 2012, a total investment gain of $128.1 million which was comprised of a gain of $113.4 million in our U.S. Qualified Plan and a gain of $14.7 million in our non-U.S. plans; (ii) for the year ended December 31, 2011, a total investment gain of $39.3 million which was comprised of a gain of $27.7 million in our U.S. Qualified Plan and a gain of $11.6 million in our non-U.S. plans; and (iii) for the year ended December 31, 2010, a total investment gain of $138.5 million which was comprised of a gain of $126.3 million in our U.S. Qualified Plan and a gain of $12.2 million in our non-U.S. plans. At January 1, 2013, the market-related value of plan assets of our U.S. Qualified Plan and the non-U.S. plans was $1,097.0 million and $217.0 million, respectively, compared with the fair value of its plan assets of $1,166.4 million and $194.5 million, respectively.
Changes in the funded status of our pension plans could result in fluctuation in our shareholders' equity (deficit). We are required to recognize the funded status of our benefit plans as a liability or an asset, on a plan-by-plan basis with an offsetting adjustment to Accumulated Other Comprehensive Income (“AOCI”), in our shareholders' equity (deficit), net of tax. Accordingly, the amounts recognized in equity represent unrecognized gains/losses and prior service costs. These unrecognized gains/losses and prior service costs are amortized out of equity (deficit) based on an actuarial calculation each period. Gains/losses and prior service costs that arise during the year are recognized as a component of Other Comprehensive Income (“OCI”) which is then reflected in AOCI. As a result, we recorded a net loss of $62.6 million and $122.4 million in OCI, net of applicable tax, in the years ended December 31, 2012 and 2011, respectively. The losses in 2012 and 2011 were both as a result of the deterioration of the funded status for all the plans. The decrease of the loss in 2012 was primarily due to improvement in plan asset performance in 2012 for our U.S. Qualified Plan. Funded status for our pension plans was a deficit of $653.3 million at December 31, 2012 compared to $589.4 million at December 31, 2011. The funded status for our U.S. Qualified Plan was a deficit of $315.7 million at December 31, 2012 compared to a deficit of $290.0 million at December 31, 2011. The increase in deficit was driven by the impact of assumption changes for our U.S. Qualified Plan, U.S. Non-Qualified Plans and the non-U.S. plans, partially offset by better asset performance for our U.S. Qualified Plan.
For information on pension and postretirement benefit plan contribution requirements, please see “Future Liquidity-Sources and Uses of Funds-Pension Plan and Postretirement Benefit Plan Contribution Requirements.” See Note 10 to our consolidated financial statements included in Item 8. of this Annual Report on Form 10-K for more information regarding costs of, and assumptions for, our pension and postretirement benefit obligations and costs.
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Income Taxes and Tax Contingencies
In determining taxable income for financial statement purposes, we must make certain estimates and judgments. These estimates and judgments affect the calculation of certain tax liabilities and the determination of the recoverability of certain of the deferred tax assets, which arise from temporary differences between the tax and financial statement recognition of revenue and expense.
In evaluating our ability to recover our deferred tax assets, we consider all available positive and negative evidence including our past operating results, the existence of cumulative losses in the most recent years and our forecast of future taxable income. In estimating future taxable income, we develop assumptions including the amount of future pre-tax operating income, the reversal of temporary differences and the implementation of feasible and prudent tax planning strategies. These assumptions require significant judgment about the forecasts of future taxable income and are consistent with the plans and estimates we are using to manage the underlying businesses.
We currently have recorded valuation allowances that we will maintain until it is more likely than not the deferred tax assets will be realized. Our income tax expense recorded in the future may be reduced to the extent of decreases in our valuation allowances. The realization of our remaining deferred tax assets is primarily dependent on future taxable income in the appropriate jurisdiction. Any reduction in future taxable income may require that we record an additional valuation allowance against our deferred tax assets. An increase in the valuation allowance could result in additional income tax expense in such period and could have a significant impact on our future earnings. Changes in tax laws and rates could also affect recorded deferred tax assets and liabilities in the future. Management records the effect of a tax rate or law change on our deferred tax assets and liabilities in the period of enactment. Future tax rate or law changes could have a material effect on our financial condition, results of operations or cash flows.
In addition, the calculation of our tax liabilities involves dealing with uncertainties in the application of complex tax regulations in a multitude of jurisdictions across our global operations. We record tax liabilities for anticipated tax audit issues in the U.S. and other tax jurisdictions based on our estimate of whether, and the extent to which, additional taxes will be due. These tax liabilities are reflected net of related tax loss carry-forwards. We adjust these reserves in light of changing facts and circumstances; however, due to the complexity of some of these uncertainties, the ultimate resolution may result in a payment that is materially different from our current estimate of the tax liabilities. If our estimate of tax liabilities proves to be less than the ultimate assessment, an additional charge to expense would result. If payment of these amounts ultimately proves to be less than the recorded amounts, the reversal of the liabilities would result in tax benefits being recognized in the period when we determine the liabilities are no longer necessary.
Revenue Recognition
Revenue is recognized when the following four conditions are met:
• | Persuasive evidence of an arrangement exists; |
• | The contract fee is fixed and determinable; |
• | Delivery or performance has occurred; and |
• | Collectability is reasonably assured. |
If at the outset of an arrangement we determine that collectability is not reasonably assured, revenue is deferred until the earlier of when collectability becomes probable or the receipt of payment. If there is uncertainty as to the customer’s acceptance of our deliverables, revenue is not recognized until the earlier of receipt of customer acceptance or expiration of the acceptance period. If at the outset of an arrangement we determine that the arrangement fee is not fixed or determinable, revenue is deferred until the arrangement fee becomes fixed or determinable, assuming all other revenue recognition criteria have been met.
Our Risk Management Solutions are generally sold under fixed price subscription contracts that allow customers unlimited access to risk information. Revenue on this type of contract is recognized ratably over the term of the contract.
Risk information is also sold using monthly or annual contracts that allow customers to purchase our risk information up to the contract amount based on an agreed price list. Once the contract amount is fully used, additional risk information can be purchased at per-item prices which may be different than those in the original contract. Revenue on these contracts is recognized on a per-item basis as information is purchased and delivered to the customer. If customers do not use the full amount of their contract and forfeit the unused portion, we recognize the forfeited amount as revenue at contract expiration.
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Where a data file of risk information is sold with periodic updates to that information, a portion of the revenue related to the updates is deferred as a liability on the balance sheet and recognized as the updates are delivered, usually on a quarterly or monthly basis over the term of the contract.
Revenue related to services, such as monitoring, is recognized ratably over the period of performance.
Sales & Marketing Solutions that provide continuous access to our marketing information and business reference databases may include access or hosting fees which are sold on a subscription basis. Revenue is recognized ratably over the term of the contract, which is typically one year.
Where a data file of marketing information is sold, we recognize revenue upon delivery of the marketing data file to the customer. If the contract provides for periodic updates to that marketing data file, the portion of the revenue related to updates is deferred as a liability on the balance sheet and recognized as the updates are delivered, usually on a quarterly or monthly basis, over the term of the contract.
Internet Solutions primarily represents the results of our Hoover’s business. Hoover’s provides subscription solutions that allow continuous access to our business information databases. Revenue is recognized ratably over the term of the contract, which is generally one year. Any additional solutions purchased are recognized upon delivery to the customer.
Sales of software that are considered to be more than incidental are recognized in revenue when a non-cancelable license agreement has been signed and the software has been shipped and installed, if required.
Revenue from consulting and training services is recognized as the services are performed.
Multiple Element Arrangements
Effective January 1, 2011, we adopted Accounting Standards Update (“ASU”) 2009-13, “Revenue Recognition—Multiple-Deliverable Revenue Arrangements,” which amends guidance in Accounting Standards Codification (“ASC”) 605-25, “Revenue Recognition: Multiple-Element Arrangements,” on a prospective basis for all new or materially modified arrangements entered into on or after that date. The new standard:
• | Provides updated guidance on whether multiple deliverables exist, how the elements in an arrangement should be separated, and how the consideration should be allocated; |
• | Requires an entity to allocate revenue in an arrangement using the best estimated selling prices (“BESP”) of each element if a vendor does not have vendor-specific objective evidence of selling prices (“VSOE”) or third-party evidence of selling price (“TPE”); and |
• | Eliminates the use of the residual method and requires a vendor to allocate revenue using the relative selling price method. |
We have certain solution offerings that are sold as multi-element arrangements. The multiple element arrangements or deliverables may include access to our business information database, information data files, periodic data refreshes, software and services. We evaluate each deliverable in an arrangement to determine whether it represents a separate unit of accounting. Most product and service deliverables qualify as separate units of accounting and can be sold stand-alone or in various combinations across our markets. A deliverable constitutes a separate unit of accounting when it has stand-alone value and there are no customer-negotiated refunds or return rights for the delivered items. If the arrangement includes a customer-negotiated refund or return right relative to the delivered items, and the delivery and performance of the undelivered item is considered probable and substantially in our control, the delivered item constitutes a separate unit of accounting. The new guidance requires for deliverables with stand-alone value in a multi-element arrangement for which revenue was previously deferred due to undelivered elements not having the fair value of the selling price to be separated and recognized as delivered, rather than over the longest service delivery period as a single unit with other elements in the arrangement.
If the deliverable or a group of deliverables meet the separation criteria, the total arrangement consideration is allocated to each unit of accounting based on its relative selling price. The amount of arrangement consideration that is allocated to a delivered unit of accounting is limited to the amount that is not contingent upon the delivery of another unit of accounting.
We determine the selling price for each deliverable using VSOE, if it exists, TPE if VSOE does not exist, or BESP if neither VSOE nor TPE exist. Revenue allocated to each element is then recognized when the basic revenue recognition criteria are met for each element.
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Consistent with our methodology under the previous accounting guidance, we determine VSOE of a deliverable by monitoring the price at which we sell the deliverable on a stand-alone basis to third parties or from the stated renewal rate for the elements contained in the initial arrangement. In certain instances, we are not able to establish VSOE for all deliverables in an arrangement with multiple elements. This may be due to us infrequently selling each element separately, not pricing products or services within a set range, or only having a limited sales history. Where we are unable to establish VSOE, we may use the price at which we or a third party sell a similar product to similarly situated customers on a stand-alone basis. Generally, our offerings contain a level of differentiation such that comparable pricing of solutions with similar functionality or delivery cannot be obtained. Furthermore, we are rarely able to reliably determine what similar competitors’ selling prices are on a stand-alone basis. Therefore, we typically are not able to determine TPE of selling price.
When we are unable to establish selling prices by using VSOE or TPE, we establish the BESP in our allocation of arrangement consideration. The objective of BESP is to determine the price at which we would transact a sale if the solution were sold on a stand-alone basis. The determination of BESP is based on our review of available data points and consideration of factors such as but not limited to pricing practices, our growth strategy, geographies and customer segment and market conditions. The determination of BESP is made through consultation with and formal approval of our management, taking into consideration our go-to-market strategy.
We regularly review VSOE and have a review process for TPE and BESP and maintain internal controls over the establishment and updates of these estimates.
The adoption of this new authoritative guidance did not have a material impact on our consolidated financial statements.
Prior to January 1, 2011 and pursuant to the previous accounting standards, we allocated revenue in a multiple element arrangement to each deliverable based on its relative fair value. If we did not have fair value for the delivered items, the contract fee was allocated to the undelivered items based on their fair values and the remaining residual amount, if any, was allocated to the delivered items. After the arrangement consideration, we applied the appropriate revenue recognition method from those described above for each unit of accounting, assuming all other revenue recognition criteria were met. All deliverables that did not meet the separation criteria were combined with an undelivered unit of accounting. We generally recognized revenue for a combined unit of accounting based on the method most appropriate for the last delivered item.
Deferred revenue consists of amounts billed in excess of revenue recognized on sales of our information solutions and generally relates to deferral of subscription revenue. Deferred revenue is included in current liabilities in the balance sheet and is subsequently recognized as revenue in accordance with our revenue recognition policies.
We record revenue on a net basis for those sales where we act as an agent or broker in the transaction.
Goodwill and Other Intangible Assets
Goodwill represents the excess of costs over fair value of assets of businesses acquired. Goodwill and intangibles with an indefinite life are not subject to regular periodic amortization. Instead, the carrying amount of the goodwill and indefinite-lived intangibles is tested for impairment at least annually, and between annual tests if events or circumstances warrant such a test. An impairment loss would be recognized if the carrying amount exceeded the fair value.
We assess recoverability of goodwill at the reporting unit level. A reporting unit is an operating segment or a component of an operating segment which is a business and for which discrete financial information is available and reviewed by a segment manager. At December 31, 2011, our reporting units were North America, United Kingdom, Benelux, Latin America, Partnerships, Japan, Greater China, Australia and India. We continue to manage our business through three segments. However, as of January 1, 2012, our Asia Pacific Worldwide Network has been moved out of our Europe and Other International Markets segment and into our Asia Pacific segment. See Note 14 to our consolidated financial statements included in Item 8. of this Annual Report on Form 10-K for further information. As a result, at December 31, 2012, our reporting units are North America, United Kingdom, Benelux, Europe Partnerships, Latin America, Greater China, Asia Partnerships, Australia and India.
When applicable, we will perform a qualitative assessment before calculating the fair value of a reporting unit in Step 1 of the goodwill impairment test. If we determine, on the basis of qualitative factors, that the fair value of a reporting unit is more likely than not less than the carrying amount, the two-step impairment test would be required. Otherwise, no further testing would be needed. We perform a two-step goodwill impairment test. In the first step, we compare the fair value of each reporting unit to its carrying value. We determine the fair value of our reporting units based on the market approach and also in certain instances use the income approach to further validate our results. Under the market approach, we estimate the fair value based on market multiples of current year earnings before interest, taxes, depreciation and amortization (“EBITDA”) for each individual reporting unit. For the market approach, we use judgment in identifying the relevant comparable-company market multiples (i.e., recent divestitures/acquisitions, facts and circumstances surrounding the market, dominance, growth rate, etc.).
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As of our most recent impairment analysis, the current year EBITDA multiples used to determine the individual reporting unit's fair value range from 8 to 12. For the income approach, we used projections based on management's most recent view of the long-term outlook for each reporting unit. Factors specific to each reporting unit including revenue growth, profit margins, terminal value growth rates, capital expenditures projections, assumed tax rates, discount rates and other assumptions deemed reasonable by management. For our 2012 year end impairment analysis, the discount rates used to determine the individual reporting unit's fair value range from 10% to 16%.
In the first step, if the fair value of the reporting unit exceeds the carrying value of the net assets, including goodwill assigned to that reporting unit, goodwill is not impaired and no further test is performed. However, if the carrying value of the net assets assigned to the reporting unit exceeds the fair value of the reporting unit, the second step of the impairment test is performed to determine the magnitude of the impairment, which is the implied fair value of the reporting unit's goodwill compared to the carrying value. The implied fair value of goodwill is the difference between the fair value of the reporting unit and the fair value of its identifiable net assets. If the carrying value of goodwill exceeds the implied fair value of goodwill, the impaired goodwill is written down to its implied fair value and an impairment loss equal to this difference is recorded in the period that the impairment is identified as an operating expense.
Our determination of current year EBITDA multiples are sensitive to the risk of future variances due to market conditions as well as business unit execution risks. Management assesses the relevance and reliability of the multiples by considering factors unique to its reporting units, including recent operating results, business plans, economic projections, anticipated future cash flows and other data. EBITDA multiples can also be significantly impacted by the future growth opportunities for the reporting unit as well as for the Company itself, general market and geographic sentiment, and pending or recently completed merger transactions.
Consequently, if future results fall below our forward-looking projections for an extended period of time, the results of future impairment tests could indicate impairment exists. Although we believe the multiples of current year EBITDA in our market approach make reasonable assumptions about our business, a significant increase in competition or reduction in our competitive capabilities could have a significant adverse impact on our ability to retain market share and thus on the projected values included in the market approach used to value our reporting units.
As a reasonableness check, we reconcile the estimated fair values derived in the valuations for the total company based on the individual reporting units to total D&B's enterprise value (calculated by multiplying the closing price of D&B's stock on December 31, 2012 by the number of shares outstanding at that time, adjusted for the value of the Company's debt).
At December 31, 2012, each of our reporting units had a fair value of at least 20% in excess of its carrying value.
The allocated goodwill by reportable segment is as follows:
(in millions) | Number of Reporting Units | As of December 31, 2012 | As of December 31, 2011 | ||||||
North America | 1 | $ | 266.5 | $ | 266.0 | ||||
Asia Pacific | 4 | 233.9 | 222.0 | ||||||
Europe and Other International Markets | 4 | 110.7 | 110.4 | ||||||
$ | 611.1 | $ | 598.4 | ||||||
For indefinite-lived intangibles, other than goodwill, an impairment loss is recognized if the carrying value exceeds the fair value. The estimated fair value is determined by utilizing the expected present value of the future cash flows of the assets.
No impairment charges related to goodwill and indefinite-lived intangible assets have been recognized for the fiscal years ended December 31, 2012, 2011 and 2010.
Recently Issued Accounting Standards
See Note 2 to our consolidated financial statements included in Item 8. of this Annual Report on Form 10-K for disclosure of the impact that recent accounting standards may have on our audited consolidated 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 the consolidated financial statements and related notes set forth in Item 8. of this Annual Report on Form 10-K, which have been prepared in accordance with GAAP.
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Consolidated Revenue
The following table presents our core and total revenue by segment:
For the Years Ended December 31, | |||||||||||
2012 | 2011 | 2010 | |||||||||
(Amounts in millions) | |||||||||||
Revenue: | |||||||||||
North America | $ | 1,225.6 | $ | 1,238.1 | $ | 1,214.6 | |||||
Asia Pacific | 176.8 | 164.8 | 86.8 | ||||||||
Europe and Other International Markets | 241.9 | 243.4 | 236.4 | ||||||||
Core Revenue | 1,644.3 | 1,646.3 | 1,537.8 | ||||||||
Divested and Other Businesses | 18.7 | 112.2 | 138.8 | ||||||||
Total Revenue | $ | 1,663.0 | $ | 1,758.5 | $ | 1,676.6 | |||||
The following table presents our core and total revenue by customer solution set:
For the Years Ended December 31, | |||||||||||
2012 | 2011 | 2010 | |||||||||
(Amounts in millions) | |||||||||||
Revenue: | |||||||||||
Risk Management Solutions | $ | 1,047.6 | $ | 1,074.5 | $ | 995.9 | |||||
Sales & Marketing Solutions | 478.5 | 452.6 | 434.4 | ||||||||
Internet Solutions | 118.2 | 119.2 | 107.5 | ||||||||
Core Revenue | 1,644.3 | 1,646.3 | 1,537.8 | ||||||||
Divested and Other Businesses | 18.7 | 112.2 | 138.8 | ||||||||
Total Revenue | $ | 1,663.0 | $ | 1,758.5 | $ | 1,676.6 | |||||
Year Ended December 31, 2012 vs. Year Ended December 31, 2011
Total revenue decreased $95.5 million, or 5% (both before and after the effect of foreign exchange), for the year ended December 31, 2012 as compared to the year ended December 31, 2011. The decrease in total revenue was primarily driven by a decrease in Asia Pacific total revenue of $72.8 million, or 27% (both before and after the effect of foreign exchange), a decrease in North America total revenue of $21.2 million, or 2% (both before and after the effect of foreign exchange) and a decrease in Europe and Other International Markets total revenue of $1.5 million, or 1% (3% increase before the effect of foreign exchange).
Asia Pacific total revenue was negatively impacted by: (a) the divestiture of: (i) the domestic portion of our Japanese operations to TSR Ltd.; (ii) our market research business in China, consisting of two joint venture companies; and (iii) a research and advisory services business in India; and (b) the shut-down of our Roadway business, during the year ended December 31, 2012, all of which we reclassified as Divested and Other Businesses partially offset by the acquisition of MicroMarketing.
North America total revenue was negatively impacted by the divesture of: (i) AllBusiness.com, Inc.; (ii) Purisma Incorporated and (iii) a small supply management company during the year ended December 31, 2012, all of which we reclassified as Divested and Other Businesses.
Core revenue, which reflects total revenue less revenue from Divested and Other Businesses, decreased $2.0 million, or less than 1% (1% increase before the effect of foreign exchange), for the year ended December 31, 2012 as compared to the year ended December 31, 2011. The decrease in core revenue is primarily attributed to:
• | Lower revenue in the North America risk business from non-DNBi subscription products, projects and DNBi modules due to budget constraints as customers continue to manage their spending in the current economic climate; |
partially offset by:
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• | Growth in Sales & Marketing products, including Optimizer and our Data as a Service or “DaaS” offerings (e.g., D&B 360); |
• | An increase in revenue as a result of the acquisition of MicroMarketing, which we consolidated in the fourth quarter of 2011; and |
• | Increased collections revenue in our Australia market, primarily due to recovery from the prior year's natural disasters, which slowed-down collection activity in 2011. |
Customer Solution Sets
On a customer solution set basis, core revenue reflects:
• | A $26.9 million, or 3% decrease (2% decrease before the effect of foreign exchange), in Risk Management Solutions. The decrease was driven by a decrease in revenue in North America of $29.1 million, or 4% (both before and after the effect of foreign exchange), and a decrease in revenue in Europe and Other International Markets of $0.8 million, or less than 1% (4% increase before the effect of foreign exchange), partially offset by an increase in revenue in Asia Pacific of $3.0 million, or 2% (3% increase before the effect of foreign exchange); |
• | A $25.9 million, or 6% increase (both before and after the effect of foreign exchange), in Sales & Marketing Solutions. The increase was driven by an increase in revenue in North America of $17.8 million, or 5% (both before and after the effect of foreign exchange) and an increase in revenue in Asia Pacific of $9.1 million, or 47% (55% increase before the effect of foreign exchange), partially offset by a decrease in Europe and Other International Markets of $1.0 million, or 3% (flat before the effect of foreign exchange); and |
• | A $1.0 million, or 1% decrease (both before and after the effect of foreign exchange), in Internet Solutions. The decrease was driven by a decrease in revenue in North America of $1.2 million, or 1% (both before and after the effect of foreign exchange), and a decrease in revenue in Asia Pacific of $0.1 million, or 10% (flat before the effect of foreign exchange), partially offset by an increase in Europe and Other International Markets of $0.3 million, or 16% (18% increase before the effect of foreign exchange). |
Year Ended December 31, 2011 vs. Year Ended December 31, 2010
Total revenue increased $81.9 million, or 5% (3% increase before the effect of foreign exchange), for the year ended December 31, 2011 as compared to the year ended December 31, 2010. The increase in total revenue was primarily driven by an increase in Asia Pacific total revenue of $90.5 million, or 51% (43% increase before the effect of foreign exchange), and an increase in Europe and Other International Markets total revenue of $7.0 million, or 3% (1% decrease before the effect of foreign exchange), partially offset by a decrease in North America total revenue of $15.6 million, or 1% (both before and after the effect of foreign exchange).
Asia Pacific total revenue was negatively impacted by: a) the divestiture of: (i) the domestic portion of our Japanese operations to TSR Ltd.; (ii) our market research business in China, consisting of two joint venture companies; and (iii) a research and advisory services business in India; and (b) the shut-down of our Roadway business, during the year ended December 31, 2012, all of which we reclassified as Divested and Other Businesses.
North America total revenue was negatively impacted by the divestiture of: (i) AllBusiness.com, Inc.; (ii) Purisma Incorporated and (iii) a small supply management company, during the year ended December 31, 2012, all of which we reclassified as Divested and Other Businesses.
North America total revenue was negatively impacted by the divestiture of our North American Self Awareness Solution business during the year ended December 31, 2010.
Core revenue, which reflects total revenue less revenue from Divested and Other Businesses, increased $108.5 million, or 7% (6% increase before the effect of foreign exchange), for the year ended December 31, 2011 as compared to the year ended December 31, 2010. The increase in core revenue is primarily attributed to:
• | Increased revenue as a result of the acquisition of D&B Australia, which we consolidated in the fourth quarter of 2010; |
• | The positive impact of foreign exchange; and |
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• | Increased purchases by new and existing customers in certain of our international markets; |
partially offset by:
• | Decline in growth due to a lack of innovation in Risk Management Solutions, resulting from our strategic decision to move Risk Management Solutions product innovation to our state of the art application development center in Dublin, Ireland. |
Customer Solution Sets
On a customer solution set basis, core revenue reflects:
• | A $78.6 million, or 8% increase (6% increase before the effect of foreign exchange), in Risk Management Solutions. The increase was driven by an increase in revenue in Asia Pacific of $72.1 million, or 100%, (90% increase before the effect of foreign exchange), an increase revenue in Europe and Other International Markets of $3.5 million, or 2% (2% decrease before the effect of foreign exchange), and an increase in revenue in North America of $3.0 million, or less than 1% (less than 1% increase before the effect of foreign exchange). |
• | An $18.2 million, or 4% increase (both before and after the effect of foreign exchange), in Sales & Marketing Solutions. The increase was driven by an increase in revenue in North America of $8.7 million, or 2% (both before and after the effect of foreign exchange), and an increase in revenue in Asia Pacific of $6.1 million, or 45% (43% increase before the effect of foreign exchange), and an increase in revenue in Europe and Other International Markets of $3.4 million, or 9% (6% increase before the effect of foreign exchange); and |
• | An $11.7 million, or 11% increase (both before and after the effect of foreign exchange), in Internet Solutions. The increase was driven by an increase in revenue in North America of $11.8 million, or 11% (both before and after the effect of foreign exchange), and an increase in revenue in Europe and Other International Markets of $0.1 million, or 2% (2% decrease before the effect of foreign exchange), partially offset by a decrease in revenue in Asia Pacific of $0.2 million, or 15% (both before and after the effect of foreign exchange). |
Recent Developments
On March 18, 2012, we announced that we had temporarily suspended our Shanghai Roadway D&B Marketing Services Co. Ltd. (“Roadway”) operations in China, pending an investigation into allegations that its data collection practices may have violated local Chinese consumer data privacy laws. Thereafter, the Company decided to permanently cease the operations of Roadway. In addition, we have been reviewing certain allegations that we may have violated the Foreign Corrupt Practices Act ("FCPA") and certain other laws in our China operations. As previously reported, we have voluntarily contacted the Securities and Exchange Commission ("SEC") and the United States Department of Justice ("DOJ") to advise both agencies of our investigation. Our investigation remains ongoing and is being conducted at the direction of the Audit Committee.
For the year ended December 31, 2012, the Roadway business had $5.4 million of revenue and $14.5 million of operating loss. Additionally, during the year ended December 31, 2012, we have incurred $13.5 million of legal fees and other corporate shut-down costs and $2.1 million in local shut-down costs, as well as an impairment charge of $12.9 million related to accounts receivable, intangible assets, prepaid costs and software for Roadway, an operation in our Greater China reporting unit. D&B acquired Roadway’s operations in 2009, and for 2011 Roadway accounted for approximately $22 million in revenue and $2 million in operating income.
On September 28, 2012, Roadway was charged in a Bill of Prosecution, along with five current or former employees, by the Shanghai District Prosecutor with illegally obtaining private information of Chinese citizens. On December 28, 2012, the Chinese court imposed a monetary fine on Roadway and fines and imprisonment on four Roadway employees. A fifth Roadway employee was separated from the case.
We performed a goodwill impairment assessment for the Greater China reporting unit during the fourth quarter of 2012. The assessment did not result in a goodwill impairment charge for the year ended December 31, 2012. The key assumptions factored in the goodwill impairment assessment were: recent operating results, economic projections, anticipated future revenue and cash flows and potential sanctions imposed by the Chinese government. The fair value of the Greater China reporting unit exceeded its carrying value by more than 20%. Total goodwill associated with the reporting unit was $36.3 million at December 31, 2012. A 100 basis points increase or decrease in the revenue growth or discount rate assumption will have a 5% impact on the fair value of the Greater China reporting unit. See Note 13 to our consolidated financial statements included in this Annual Report on Form 10-K for further discussion on this investigation.
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We are presently unable to predict the duration, scope or result of the Audit Committee’s investigation, of any investigations by the SEC, or the DOJ, or any other U.S. or foreign governmental authority, or whether any such authority will commence any legal action against us. The SEC and the DOJ have a broad range of civil and criminal sanctions available to them under the FCPA and other laws and regulations including, but not limited to, injunctive relief, disgorgement, fines, penalties, modifications to business practices, including the termination or modification of existing business relationships and the imposition of compliance programs and the retention of a monitor to oversee compliance with the FCPA. These investigations could ultimately result in penalties or other payments by us. In connection with the wind down of the Roadway operations, we believe we may incur additional cash expenditures for severance, lease payments and other costs.
Consolidated Operating Costs
The following table presents our consolidated operating costs and operating income:
For the Years Ended December 31, | |||||||||||
2012 | 2011 | 2010 | |||||||||
(Amounts in millions) | |||||||||||
Operating Expenses | $ | 521.0 | $ | 587.1 | $ | 557.7 | |||||
Selling and Administrative Expenses | 602.2 | 643.4 | 626.9 | ||||||||
Depreciation and Amortization | 78.3 | 81.1 | 68.1 | ||||||||
Restructuring Charge | 29.4 | 22.1 | 14.8 | ||||||||
Operating Costs | $ | 1,230.9 | $ | 1,333.7 | $ | 1,267.5 | |||||
Operating Income | $ | 432.1 | $ | 424.8 | $ | 409.1 | |||||
Operating Expenses
Year Ended December 31, 2012 vs. Year Ended December 31, 2011
Operating expenses decreased $66.1 million, or 11%, for the year ended December 31, 2012, compared to the year ended December 31, 2011. The decrease was primarily due to the following:
• | Lower costs as a result of: (a) the divestiture of (i) the domestic portion of our Japanese operations to TSR Ltd.; and (ii) our market research business in China, consisting of two joint venture companies, and (b) the shut-down of our Roadway business; and |
• | Lower compensation costs. |
Year Ended December 31, 2011 vs. Year Ended December 31, 2010
Operating expenses increased $29.4 million, or 5%, for the year ended December 31, 2011, compared to the year ended December 31, 2010. The increase was primarily due to the following:
• | Increased data acquisition costs and fulfillment costs primarily associated with our acquisition of D&B Australia, which we consolidated in the fourth quarter of 2010; |
• | The negative impact of foreign exchange; and |
• | Increased costs associated with our Strategic Technology Investment or MaxCV designed to strengthen our leading position in commercial data and improve our current technology platform to meet emerging needs of customers. As part of our Strategic Technology Investment, which we refer to as “MaxCV” for Maximizing Customer Value, we migrated customers to newer, and higher performing platforms, such as Hoover’s, while we shut down legacy products that were supported by our new data supply chain; |
partially offset by:
• | Impairment of certain intangible assets reflected in the year ended December 31, 2010 related to our 2007 Purisma acquisition (which was not repeated for the year ended December 31, 2011); |
• | Lower compensations costs; and |
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• | Lower expenses as a result of our 2010 divestiture of our North American Self Awareness Solution business. |
Selling and Administrative Expenses
Year Ended December 31, 2012 vs. Year Ended December 31, 2011
Selling and administrative expenses decreased $41.2 million, or 6%, for the year ended December 31, 2012, compared to the year ended December 31, 2011. The decrease was primarily due to the following:
• | Lower costs as a result of: (a) the divestiture of (i) the domestic portion of our Japanese operations to TSR Ltd.; and (ii) our market research business in China, consisting of two joint venture companies; and (b) the shut-down of our Roadway business; and |
• | Lower compensations costs; |
partially offset by:
• | Legal fees and other shut-down expenses associated with matters in China (see “Recent Developments” discussed above and Note 13 to our consolidated financial statements in Item 8. of this Annual Report on Form 10-K). |
Year Ended December 31, 2011 vs. Year Ended December 31, 2010
Selling and administrative expenses increased $16.5 million, or 3%, for the year ended December 31, 2011, compared to the year ended December 31, 2010. The increase was primarily due to the following:
• | Increased selling expenses primarily associated with our acquisition of D&B Australia, which we consolidated in the fourth quarter of 2010; and |
• | The negative impact of foreign exchange; |
partially offset by:
• | Lower expenses as a result of our divestiture of our North American Self Awareness Solution business. |
Matters Impacting Both Operating Expenses and Selling and Administrative Expenses
Pension, Postretirement and 401(k) Plan
For our pension plans, we had a net periodic pension cost of $17.7 million, $7.1 million and $5.8 million for the years ended December 31, 2012, 2011 and 2010, respectively. The increase in the net periodic pension cost was due to the following:
• | Expected return on plan assets is a major component of the net periodic pension cost. Expected return on plan assets included in annual pension expense for all plans was $99.3 million, $110.4 million and $113.4 million for the years ended December 31, 2012, 2011 and 2010, respectively. The expected return on plan assets was determined by multiplying the expected long-term rate of return assumption by the market-related value of plan assets. The market-related value of plan assets recognizes asset gains and losses over five years to reduce the effects of short-term market fluctuations on net periodic pension costs. The decrease of expected return on plan assets was primarily due to lower market-related value of plan assets driven by asset losses incurred in 2008. |
• | Actuarial loss amortization included in annual pension expense was also a major factor in driving the pension costs to fluctuate from year-to-year. Actuarial loss amortization was largely impacted by the discount rate, amortization period and plan experience. The lower the discount rate, the higher the loss amortization. Actuarial loss amortization included in annual pension expense for all plans was $35.6 million, $26.4 million and $21.5 million for the years ended December 31, 2012, 2011 and 2010, respectively, of which $33.3 million, $24.5 million and $19.0 million were attributable to our U.S. plans for the years ended December 31, 2012, 2011 and 2010, respectively. Higher actuarial loss amortization in the U.S. plans was primarily due to lower discount rates applied to our plans at January 1, 2012 and higher actuarial losses subject to amortization. The discount rate used to measure the pension costs for our U.S. plans for the years ended December 31, 2012, 2011 and 2010 was 4.05%, 5.06% and 5.72%, respectively. |
• | The increase in actuarial loss amortization was substantially offset by lower interest cost, a component of net periodic pension costs. Interest cost included in the net periodic pension costs was $75.2 million, $85.0 million and $91.3 million, respectively, for the years ended December 31, 2012, 2011and 2010, of which $63.8 million, $73.0 |
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million and $78.4 million, respectively, were attributable to our U.S. plans for the years ended December 31, 2012, 2011and 2010. The decrease of interest cost for our U.S. plans was due to lower discount rates.
We expect that the net pension cost in 2013 will be approximately $25 million for all of our pension plans, of which approximately $18 million and $7 million will be attributable to the U.S. plans and non-U.S. plans, respectively. This compares to a net pension cost of $17.7 million in 2012, of which $12.9 million and $4.8 million attributable to the U.S. plans and non-U.S. plans, respectively. For our U.S. plans, the increase in pension cost in 2013 is primarily driven by lower expected return on plan assets, a component of pension cost. The lower expected return on plan assets is primarily due to lower market-related value of plan assets. Higher actuarial loss amortization in 2013 will be substantially offset by lower interest cost, both driven by a lower discount rate. The discount rate applied to our U.S. plans at January 1, 2013 is 3.54%, a 51 basis points decrease from the 4.05% discount rate used for 2012.
We had postretirement benefit income of $11.0 million, $11.0 million and $7.0 million for the years ended December 31, 2012, 2011and 2010, respectively. Higher income in 2012 and 2011 compared to 2010 was primarily due to higher amortization of prior service credits. Effective July 1, 2010, in connection with the Health Care and Education Reconciliation Act of 2010, we converted the then current prescription drug program for retirees over 65 to a group-based company sponsored Medicare Part D program, or EGWP. Beginning in 2013, we will use the Part D subsidies delivered through the EGWP each year to reduce net company retiree medical costs until net company costs are completely eliminated. At that time, the Part D subsidies will be shared with retirees going forward to reduce retiree contributions. As a result, we reduced our accumulated postretirement obligation by $21 million in the third quarter of 2010, which is being amortized over approximately four years.
Both plan changes were accounted for as plan amendments under ASC 715-60-35, “Compensation-Retirement Benefits.”
We expect postretirement benefit income will be approximately $9 million in 2013. Our lower income in 2013 is primarily due to lower amortization of prior service credits resulting from one of the major credits is in the final year of amortization and the outstanding balance is less than prior year's amortization. The credit being fully amortized in 2013 was established in late 2009 as a result of the elimination of the company-paid retiree life insurance benefits and a change in the sharing methodology, where D&B will only share the minimum amount of subsidy required to maintain actuarial equivalence for as long as possible. This plan change was approved in December 2009 and reduced our accumulated postretirement obligation by approximately $20 million at December 31, 2009 which is being amortized over four years.
We had expense associated with our 401(k) Plan of $13.6 million, $15.7 million and $9.7 million for the years ended December 31, 2012, 2011 and 2010, respectively. The increase in expense in 2012 and 2011 was due to a discretionary company contribution of $5.3 million and $7.8 million, respectively, compared to $4.5 million in 2010. In addition, we amended our employer matching provision in the 401(k) Plan, effective in April 2010, to increase the employer maximum match from 50% of three percent (3%) to 50% of seven percent (7%) of a team member's eligible compensation, subject to certain 401(k) Plan limitations.
We consider net pension cost and postretirement benefit income to be part of our compensation costs, and, therefore, they are included in operating expenses and in selling and administrative expenses, based upon the classifications of the underlying compensation costs. See the discussion of “Our Critical Accounting Policies and Estimates-Pension and Postretirement Benefit Obligations,” above, and Note 10 to our consolidated financial statements included in Item 8. of this Annual Report on Form 10-K.
Stock-Based Compensation
For the years ended December 31, 2012, 2011 and 2010, we recognized total stock-based compensation expense (e.g., stock options, restricted stock, etc.) of $10.6 million, $12.4 million and $18.3 million, respectively.
For the years ended December 31, 2012, 2011 and 2010, we recognized expense associated with our stock option programs of $3.8 million, $4.1 million and $6.5 million, respectively. The decrease for the year ended December 31, 2012 as compared to the year ended December 31, 2011 was primarily due to a decrease in the fair value of stock options issued over the past several years. The decrease for the year ended December 31, 2011 as compared to the year ended December 31, 2010 was primarily due to a decrease in the fair value of the stock options issued over the past several years.
For the years ended December 31, 2012, 2011 and 2010, we recognized expense associated with our restricted stock, restricted stock units and restricted stock opportunity programs of $6.1 million, $7.5 million and $11.0 million, respectively. The decrease for the year ended December 31, 2012 as compared to the year ended December 31, 2011 was primarily due to lower expense as a result of below target performance under the restricted stock opportunity programs as well as higher forfeitures associated with terminated employees. The decrease for the year ended December 31, 2011 as compared to the year
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ended December 31, 2010 was primarily due to a decrease in the fair value of the awards issued over the past several years as well as lower expense as a result of higher forfeitures associated with terminated employees.
For the years ended December 31, 2012, 2011 and 2010, we recognized expense associated with our Employee Stock Purchase Plan (“ESPP”) of $0.7 million, $0.8 million and $0.8 million, respectively.
We consider these costs to be part of our compensation costs and, therefore, they are included in operating expenses and in selling and administrative expenses, based upon the classifications of the underlying compensation costs.
Depreciation and Amortization
Depreciation and amortization decreased $2.8 million, or 4%, for the year ended December 31, 2012 as compared to the year ended December 31, 2011. This decrease was primarily driven by the shut-down of our Roadway business, the divestiture of our market research business in China, consisting of two joint venture companies and the divestiture of AllBusiness.com, Inc.
Depreciation and amortization increased $13.0 million, or 19%, for the year ended December 31, 2011 as compared to the year ended December 31, 2010. This increase was primarily driven by an increase in amortization of acquired intangible assets resulting from our acquisitions and increased capital costs for investments to enhance our strategic capabilities (e.g., Strategic Technology Investment or MaxCV).
Restructuring Charge
Financial Flexibility is an ongoing process by which we seek to reallocate our spending from low-growth or low-value activities to other activities that will create greater value for shareholders through enhanced revenue growth, improved profitability and/or quality improvements. With most initiatives, we have incurred restructuring charges (which generally consist of employee severance and termination costs, contract terminations and/or costs to terminate lease obligations less assumed sublease income). These charges are incurred as a result of eliminating, consolidating, standardizing and/or automating our business functions.
Restructuring charges have been recorded in accordance with ASC 712-10, “Nonretirement Postemployment Benefits,” or “ASC 712-10” and/or ASC 420-10, “Exit or Disposal Cost Obligations,” or “ASC 420-10,” as appropriate.
We record severance costs provided under an ongoing benefit arrangement once they are both probable and estimable in accordance with the provisions of ASC 712-10.
We account for one-time termination benefits, contract terminations and/or costs to terminate lease obligations less assumed sublease income in accordance with ASC 420-10, which addresses financial accounting and reporting for costs associated with restructuring activities. Under ASC 420-10, we establish a liability for cost associated with an exit or disposal activity, including severance and lease termination obligations, and other related costs, when the liability is incurred, rather than at the date that we commit to an exit plan. We reassess the expected cost to complete the exit or disposal activities at the end of each reporting period and adjust our remaining estimated liabilities, if necessary.
The determination of when we accrue for severance costs and which standard applies depends on whether the termination benefits are provided under an ongoing arrangement as described in ASC 712-10 or under a one-time benefit arrangement as defined by ASC 420-10. Inherent in the estimation of the costs related to the restructurings are assessments related to the most likely expected outcome of the significant actions to accomplish the exit activities. In determining the charges related to the restructurings, we had to make estimates related to the expenses associated with the restructurings. These estimates may vary significantly from actual costs depending, in part, upon factors that may be beyond our control. We will continue to review the status of our restructuring obligations on a quarterly basis and, if appropriate, record changes to these obligations in current operations based on management’s most current estimates.
During the year ended December 31, 2012, we recorded a $29.4 million restructuring charge. The significant components of these charges included:
• | Severance and termination costs of $17.7 million and $5.0 million in accordance with the provisions of ASC 712-10 and ASC 420-10, respectively, were recorded. Approximately 765 employees were impacted. Of these 765 employees, approximately 690 employees exited the Company in 2012 and approximately 75 employees will exit the Company in 2013. The cash payments for these employees will be substantially completed by the third quarter of 2013; and |
• | Lease termination obligations, other costs to consolidate or close facilities and other exit costs of $6.7 million. |
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During the year ended December 31, 2011, we recorded a $22.1 million restructuring charge. The significant components of these charges included:
• | Severance and termination costs of $17.5 million in accordance with the provisions of ASC 712-10 were recorded. Approximately 400 employees were impacted. Of these 400 employees, approximately 305 employees exited the Company in 2011 and approximately 95 employees exited the Company in 2012. The cash payments for these employees were substantially completed by the third quarter of 2012; and |
• | Lease termination obligations, other costs to consolidate or close facilities and other exit costs of $4.6 million. |
During the year ended December 31, 2010, we recorded a $14.8 million restructuring charge. The significant components of these charges included:
• | Severance and termination costs of $11.7 million in accordance with the provisions of ASC 712-10 were recorded. Approximately 325 employees were impacted. Of these 325 employees, approximately 315 employees exited the Company in 2010 and approximately 10 employees exited the Company in 2011. The cash payments for these employees were substantially completed by the second quarter of 2011; and |
• | Lease termination obligations, other costs to consolidate or close facilities and other exit costs of $3.1 million. |
Interest Income (Expense) – Net
The following table presents our “Interest Income (Expense) – Net:"
For the Years Ended December 31, | |||||||||||
2012 | 2011 | 2010 | |||||||||
(Amounts in millions) | |||||||||||
Interest Income | $ | 0.8 | $ | 1.5 | $ | 2.1 | |||||
Interest Expense | (39.5 | ) | (37.0 | ) | (46.0 | ) | |||||
Interest Income (Expense) - Net | $ | (38.7 | ) | $ | (35.5 | ) | $ | (43.9 | ) | ||
Interest income decreased $0.7 million, or 42%, for the year ended December 31, 2012 as compared to the year ended December 31, 2011. The decrease in interest income is primarily attributable to lower average interest rates. Interest income decreased $0.6 million, or 29%, for the year ended December 31, 2011 as compared to the year ended December 31, 2010. The decrease in interest income is primarily attributable to lower average interest rates.
Interest expense increased $2.5 million, or 7%, for the year ended December 31, 2012 as compared to the year ended December 31, 2011. The increase in interest expense is primarily attributable to higher amounts of average debt outstanding. Interest expense decreased $9.0 million, or 20%, for the year ended December 31, 2011 as compared to the year ended December 31, 2010. The decrease in interest expense is primarily attributable to lower average interest rates and lower amounts of average debt outstanding.
Other Income (Expense) – Net
The following table presents our “Other Income (Expense) – Net:”
For the Years Ended December 31, | |||||||||||
2012 | 2011 | 2010 | |||||||||
(Amounts in millions) | |||||||||||
Effect of Legacy Tax Matters (a) | $ | (14.8 | ) | $ | (7.1 | ) | $ | (0.4 | ) | ||
Gain (Loss) on Sale of Businesses (b) | 6.1 | — | 23.1 | ||||||||
Loss on Investment (c) | — | (11.4 | ) | — | |||||||
One-Time Gain on Hedge of Purchase Price on the Australia Acquisition (d) | — | — | 3.4 | ||||||||
Miscellaneous Other Income (Expense) - Net (e) | (6.4 | ) | (2.7 | ) | (3.4 | ) | |||||
Other Income (Expense) - Net | $ | (15.1 | ) | $ | (21.2 | ) | $ | 22.7 | |||
(a) | During the year ended December 31, 2012, we recognized the reduction of a contractual receipt under the Tax Allocation Agreement between Moody's Corporation and D&B as it relates to the expiration of the statute of limitations |
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for Moody's Corporation for the tax years 2005 and 2006. During the year ended December 31, 2011, we recognized the reduction of a contractual receipt under the Tax Allocation Agreement between Moody’s Corporation and D&B as it relates to the expiration of the statute of limitations for Moody's Corporation for the tax year 2004. During the year ended December 31, 2010, we had an agreement to pay Moody's Corporation $2.5 million as it relates to the Tax Allocation Agreement, which we paid in February 2011.
(b) | During the year ended December 31, 2012, we recognized gains primarily related to the sale of: (i) the domestic portion of our Japanese operations to TSR Ltd.; (ii) Purisma Incorporated; and (iii) our market research business in China, consisting of two joint venture companies. During the year ended December 31, 2010, we recognized a gain from the sale of our North American Self Awareness Solution business. See Note 17 to our consolidated financial statements in Item 8. of this Annual Report on Form 10-K. |
(c) | During the year ended December 31, 2011, we recorded an impairment charge related to a 2008 investment in a research and development data firm as a result of its financial condition and our focus on MaxCV. |
(d) | During the year ended December 31, 2010, we recognized a gain resulting from a hedge on the purchase price of D&B Australia during the third quarter of 2010. |
(e) | Miscellaneous Other Income (Expense) – Net increased for the year ended December 31, 2012 compared to the year ended December 31, 2011, primarily due to costs of $5.8 million incurred to accelerate the redemption of our senior notes with a face value of $400 million that were scheduled to mature on April 1, 2013 (the "2013 notes"), partially offset by the positive impact of foreign exchange. Miscellaneous Other Income (Expense) – Net decreased for the year ended December 31, 2011 compared to the year ended December 31, 2010, primarily due to costs in the prior year related to a premium payment of $3.7 million made for the redemption of the $300 million senior notes with a maturity date of March 25, 2011 (the "2011 notes"), partially offset by the negative impact of foreign exchange. |
Provision for Income Taxes
Effective Tax Rate for the Year Ended December 31, 2010 | 35.5 | % |
Impact of Loss on Investment | (2.1 | )% |
Impact of Legacy Tax Matters | (3.5 | )% |
Other | (0.2 | )% |
Effective Tax Rate for the Year Ended December 31, 2011 | 29.7 | % |
Impact of Legacy Tax Matters | (2.9 | )% |
Impact of Loss on Investment | (1.5 | )% |
Impact of Income Earned in Jurisdictions with Lower Tax Rates | (2.2 | )% |
Other | (1.1 | )% |
Effective Tax Rate for the Year Ended December 31, 2012 | 22.0 | % |
We expect our tax rate from ongoing operations to have a beneficial impact beginning 2015 as we expect to (a) create a global center of excellence for product innovation; (b) in-source, centralize and streamline certain of our business operations; and (c) reduce our operating costs of our business.
Earnings per Share
We assess if any of our share-based payment transactions are deemed participating securities prior to vesting and therefore need to be included in the earnings allocation when computing EPS under the two-class method. The two-class method requires earnings to be allocated between common shareholders and holders of participating securities. All outstanding unvested share-based payment awards that contain non-forfeitable rights to dividends are considered to be a separate class of common stock and should be included in the calculation of basic and diluted EPS. Based on a review of our stock-based awards, we have determined that only our restricted stock awards are deemed participating securities. The weighted average restricted shares outstanding were 11,658 shares, 66,495 shares and 196,175 shares for the years ended December 31, 2012, 2011 and 2010, respectively.
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The following table sets forth our EPS:
For the Years Ended December 31, | |||||||||||
2012 | 2011 | 2010 | |||||||||
Basic Earnings Per Share of Common Stock Attributable to D&B Common Shareholders | $ | 6.47 | $ | 5.31 | $ | 5.03 | |||||
Diluted Earnings Per Share of Common Stock Attributable to D&B Common Shareholders | $ | 6.43 | $ | 5.28 | $ | 4.98 | |||||
For the year ended December 31, 2012, both basic EPS attributable to D&B common shareholders and diluted EPS attributable to D&B common shareholders increased 22%, compared with the year ended December 31, 2011, due to an increase of