DNB-2013-6.30-10Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
___________________________________
Form 10-Q
___________________________________
(Mark One)
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ý | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2013
OR
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¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number 1-15967
___________________________________
The Dun & Bradstreet Corporation
(Exact name of registrant as specified in its charter)
___________________________________
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Delaware | 22-3725387 |
(State of incorporation) | (I.R.S. Employer Identification No.) |
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103 JFK Parkway, Short Hills, NJ | 07078 |
(Address of principal executive offices) | (Zip Code) |
Registrant’s telephone number, including area code: (973) 921-5500
Indicate by check mark whether the registrant: (1) has filed all reports required 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 ý No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý No ¨
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:)
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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 ¨ No ý
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:
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Title of Class | | Shares Outstanding at June 30, 2013 |
Common Stock, | | 38,797,378 |
par value $0.01 per share | | |
THE DUN & BRADSTREET CORPORATION
INDEX TO FORM 10-Q
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| PART I. FINANCIAL INFORMATION | |
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Item 1. | | |
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Item 2. | | |
Item 3. | | |
Item 4. | | |
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| PART II. OTHER INFORMATION | |
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Item 1. | | |
Item 1A. | | |
Item 2. | | |
Item 5. | | |
Item 6. | | |
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PART I. FINANCIAL INFORMATION
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Item 1. | Financial Statements |
The Dun & Bradstreet Corporation Consolidated Statements of Operations and Comprehensive Income (Unaudited) |
| | | | | | | | | | | | | | | |
| Three Months Ended | | Six Months Ended |
| June 30, | | June 30, |
| 2013 | | 2012 | | 2013 | | 2012 |
| (Amounts in millions, except per share data) |
Revenue | $ | 386.4 |
| | $ | 383.9 |
| | $ | 767.4 |
| | $ | 786.7 |
|
Operating Expenses | 130.1 |
| | 126.4 |
| | 256.3 |
| | 271.0 |
|
Selling and Administrative Expenses | 142.3 |
| | 139.2 |
| | 288.7 |
| | 293.7 |
|
Depreciation and Amortization | 17.9 |
| | 19.7 |
| | 36.2 |
| | 39.9 |
|
Restructuring Charge | 2.2 |
| | 9.3 |
| | 4.5 |
| | 18.4 |
|
Operating Costs | 292.5 |
| | 294.6 |
| | 585.7 |
| | 623.0 |
|
Operating Income | 93.9 |
| | 89.3 |
| | 181.7 |
| | 163.7 |
|
Interest Income | 0.4 |
| | 0.2 |
| | 0.6 |
| | 0.3 |
|
Interest Expense | (10.0 | ) | | (9.2 | ) | | (19.9 | ) | | (18.3 | ) |
Other Income (Expense) - Net | (0.1 | ) | | — |
| | (1.3 | ) | | 6.6 |
|
Non-Operating Income (Expense) - Net | (9.7 | ) | | (9.0 | ) | | (20.6 | ) | | (11.4 | ) |
Income Before Provision for Income Taxes and Equity in Net Income of Affiliates | 84.2 |
| | 80.3 |
| | 161.1 |
| | 152.3 |
|
Less: Provision for Income Taxes | 26.4 |
| | 24.2 |
| | 50.2 |
| | 32.5 |
|
Equity in Net Income of Affiliates | 0.6 |
| | 0.4 |
| | 1.1 |
| | 0.8 |
|
Net Income | 58.4 |
| | 56.5 |
| | 112.0 |
| | 120.6 |
|
Less: Net (Income) Loss Attributable to the Noncontrolling Interest | (0.9 | ) | | — |
| | (1.6 | ) | | (0.7 | ) |
Net Income Attributable to D&B | $ | 57.5 |
| | $ | 56.5 |
| | $ | 110.4 |
| | $ | 119.9 |
|
Basic Earnings Per Share of Common Stock Attributable to D&B Common Shareholders | $ | 1.46 |
| | $ | 1.21 |
| | $ | 2.76 |
| | $ | 2.54 |
|
Diluted Earnings Per Share of Common Stock Attributable to D&B Common Shareholders | $ | 1.44 |
| | $ | 1.20 |
| | $ | 2.73 |
| | $ | 2.52 |
|
Weighted Average Number of Shares Outstanding-Basic | 39.4 |
| | 46.7 |
| | 40.0 |
| | 47.2 |
|
Weighted Average Number of Shares Outstanding-Diluted | 39.8 |
| | 47.0 |
| | 40.4 |
| | 47.6 |
|
Cash Dividend Paid Per Common Share | $ | 0.40 |
| | $ | 0.38 |
| | $ | 0.80 |
| | $ | 0.76 |
|
Other Comprehensive Income, Net of Tax | | | | | | | |
Net Income (from above) | $ | 58.4 |
| | $ | 56.5 |
| | $ | 112.0 |
| | $ | 120.6 |
|
Foreign Currency Translation Adjustments, no Tax Impact | (24.4 | ) | | (37.3 | ) | | (36.7 | ) | | (7.7 | ) |
Defined Benefit Pension Plans: | | | | | | | |
Prior Service Costs, Net of Tax Income (1) | (1.4 | ) | | (2.0 | ) | | (2.9 | ) | | (3.5 | ) |
Actuarial Gain (Loss), Net of Tax Expense (2) | 6.9 |
| | 6.7 |
| | 13.9 |
| | 12.1 |
|
Derivative Financial Instruments, No Tax Impact | — |
| | 0.5 |
| | — |
| | 0.8 |
|
Comprehensive Income, Net of Tax | 39.5 |
| | 24.4 |
| | 86.3 |
| | 122.3 |
|
Less: Comprehensive (Income) Loss Attributable to the Noncontrolling Interest | (0.8 | ) | | 0.2 |
| | (1.6 | ) | | (0.6 | ) |
Comprehensive Income Attributable to D&B | $ | 38.7 |
| | $ | 24.6 |
| | $ | 84.7 |
| | $ | 121.7 |
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(1) | Net of Tax Income of $0.8 million and $0.5 million during the three months ended June 30, 2013 and 2012, respectively. Net of Tax Income of $1.5 million and $1.3 million during the six months ended June 30, 2013 and 2012, respectively. |
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(2) | Net of Tax Expense of $(3.5) million and $(1.6) million during the three months ended June 30, 2013 and 2012, respectively. Net of Tax Expense of $(7.0) million and $(4.5) million during the six months ended June 30, 2013 and 2012, respectively. |
The accompanying notes are an integral part of the unaudited consolidated financial statements.
The Dun & Bradstreet Corporation Consolidated Balance Sheets (Unaudited) |
| | | | | | | |
| June 30, 2013 | | December 31, 2012 |
| (Amounts in millions, except per share data) |
ASSETS | | | |
Current Assets | | | |
Cash and Cash Equivalents | $ | 196.5 |
| | $ | 149.1 |
|
Accounts Receivable, Net of Allowance of $23.3 at June 30, 2013 and $27.3 at December 31, 2012 | 359.9 |
| | 514.3 |
|
Other Receivables | 9.5 |
| | 6.5 |
|
Prepaid Taxes | 7.9 |
| | — |
|
Deferred Income Tax | 21.9 |
| | 26.3 |
|
Other Prepaids | 25.1 |
| | 46.8 |
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Other Current Assets | 7.8 |
| | 4.4 |
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Total Current Assets | 628.6 |
| | 747.4 |
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Non-Current Assets | | | |
Property, Plant and Equipment, Net of Accumulated Depreciation of $82.5 at June 30, 2013 and $81.2 at December 31, 2012 | 39.1 |
| | 40.6 |
|
Computer Software, Net of Accumulated Amortization of $443.5 at June 30, 2013 and $431.9 at December 31, 2012 | 144.9 |
| | 140.9 |
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Goodwill | 591.0 |
| | 611.1 |
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Deferred Income Tax | 239.7 |
| | 247.8 |
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Other Receivables | 45.3 |
| | 47.1 |
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Other Intangibles | 86.8 |
| | 99.3 |
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Other Non-Current Assets | 63.1 |
| | 57.6 |
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Total Non-Current Assets | 1,209.9 |
| | 1,244.4 |
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Total Assets | $ | 1,838.5 |
| | $ | 1,991.8 |
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LIABILITIES | | | |
Current Liabilities | | | |
Accounts Payable | $ | 41.8 |
| | $ | 40.9 |
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Accrued Payroll | 56.6 |
| | 96.5 |
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Accrued Income Tax | 0.8 |
| | 9.5 |
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Short-Term Debt | 0.1 |
| | 0.2 |
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Other Accrued and Current Liabilities (Note 6) | 124.0 |
| | 118.9 |
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Deferred Revenue | 579.6 |
| | 610.7 |
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Total Current Liabilities | 802.9 |
| | 876.7 |
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Pension and Postretirement Benefits | 646.1 |
| | 668.3 |
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Long-Term Debt | 1,408.0 |
| | 1,290.7 |
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Liabilities for Unrecognized Tax Benefits | 104.5 |
| | 105.9 |
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Other Non-Current Liabilities | 65.4 |
| | 64.5 |
|
Total Liabilities | 3,026.9 |
| | 3,006.1 |
|
Contingencies (Note 7) |
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EQUITY | | | |
D&B SHAREHOLDERS’ EQUITY (DEFICIT) | | | |
Series A Junior Participating Preferred Stock, $0.01 par value per share, authorized - 0.5 shares; outstanding - none | — |
| | — |
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Preferred Stock, $0.01 par value per share, authorized - 9.5 shares; outstanding - none | — |
| | — |
|
Series Common Stock, $0.01 par value per share, authorized - 10.0 shares; outstanding - none | — |
| | — |
|
Common Stock, $0.01 par value per share, authorized - 200.0 shares; issued - 81.9 shares | 0.8 |
| | 0.8 |
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Capital Surplus | 267.6 |
| | 261.7 |
|
Retained Earnings | 2,483.6 |
| | 2,405.5 |
|
Treasury Stock, at cost, 43.1 shares at June 30, 2013 and 40.6 shares at December 31, 2012 | (3,067.3 | ) | | (2,833.3 | ) |
Accumulated Other Comprehensive Income (Loss) | (877.8 | ) | | (852.1 | ) |
Total D&B Shareholders’ Equity (Deficit) | (1,193.1 | ) | | (1,017.4 | ) |
Noncontrolling Interest | 4.7 |
| | 3.1 |
|
Total Equity (Deficit) | (1,188.4 | ) | | (1,014.3 | ) |
Total Liabilities and Shareholders’ Equity (Deficit) | $ | 1,838.5 |
| | $ | 1,991.8 |
|
The accompanying notes are an integral part of the unaudited consolidated financial statements.
The Dun & Bradstreet Corporation Consolidated Statements of Cash Flows (Unaudited) |
| | | | | | | |
| Six Months Ended |
| June 30, |
| 2013 | | 2012 |
| (Amounts in millions) |
Cash Flows from Operating Activities: | | | |
Net Income | $ | 112.0 |
| | $ | 120.6 |
|
Reconciliation of Net Income to Net Cash Provided by Operating Activities: | | | |
Depreciation and Amortization | 36.2 |
| | 39.9 |
|
Amortization of Unrecognized Pension Loss | 16.5 |
| | 11.9 |
|
(Gain) Loss from Sales of Business / Investments | — |
| | (6.0 | ) |
Impairment of Assets | — |
| | 16.1 |
|
Income Tax Benefit from Stock-Based Awards | 6.4 |
| | 3.7 |
|
Excess Tax Benefit on Stock-Based Awards | (1.0 | ) | | (0.6 | ) |
Equity Based Compensation | 6.8 |
| | 5.8 |
|
Restructuring Charge | 4.5 |
| | 18.4 |
|
Restructuring Payments | (7.4 | ) | | (13.3 | ) |
Deferred Income Taxes, Net | 0.5 |
| | 4.8 |
|
Accrued Income Taxes, Net | (18.9 | ) | | (28.5 | ) |
Changes in Current Assets and Liabilities: | | | |
(Increase) Decrease in Accounts Receivable | 146.6 |
| | 128.4 |
|
(Increase) Decrease in Other Current Assets | 18.0 |
| | 21.2 |
|
Increase (Decrease) in Deferred Revenue | (25.4 | ) | | (22.8 | ) |
Increase (Decrease) in Accounts Payable | (0.8 | ) | | 12.7 |
|
Increase (Decrease) in Accrued Liabilities | (37.9 | ) | | (59.0 | ) |
Changes in Non-Current Assets and Liabilities: | | | |
(Increase) Decrease in Other Long-Term Assets | (5.4 | ) | | 3.3 |
|
Net Increase (Decrease) in Long-Term Liabilities | (16.1 | ) | | (12.9 | ) |
Net, Other Non-Cash Adjustments | 0.1 |
| | (0.1 | ) |
Net Cash Provided by Operating Activities | 234.7 |
| | 243.6 |
|
Cash Flows from Investing Activities: | | | |
Proceeds from Sales of Businesses, Net of Cash Divested | — |
| | 7.9 |
|
Cash Settlements of Foreign Currency Contracts | (5.1 | ) | | 1.8 |
|
Capital Expenditures | (4.5 | ) | | (1.1 | ) |
Additions to Computer Software and Other Intangibles | (22.2 | ) | | (33.1 | ) |
Reimbursement of Proceeds Related to a Divested Business | (0.1 | ) | | — |
|
Net, Other | 0.1 |
| | 0.1 |
|
Net Cash Used in Investing Activities | (31.8 | ) | | (24.4 | ) |
Cash Flows from Financing Activities: | | | |
Payments for Purchases of Treasury Shares | (283.1 | ) | | (204.0 | ) |
Net Proceeds from Stock-Based Awards | 47.2 |
| | 8.5 |
|
Payments of Dividends | (32.0 | ) | | (35.7 | ) |
Proceeds from Borrowings on Credit Facilities | 350.2 |
| | 376.7 |
|
Payments of Borrowings on Credit Facilities | (232.4 | ) | | (327.5 | ) |
Excess Tax Benefit on Stock-Based Awards | 1.0 |
| | 0.6 |
|
Capital Lease and Other Long-Term Financing Obligation Payment | (0.5 | ) | | (1.5 | ) |
Net, Other | 2.6 |
| | (0.3 | ) |
Net Cash Used in Financing Activities | (147.0 | ) | | (183.2 | ) |
Effect of Exchange Rate Changes on Cash and Cash Equivalents | (8.5 | ) | | (1.8 | ) |
Increase in Cash and Cash Equivalents | 47.4 |
| | 34.2 |
|
Cash and Cash Equivalents, Beginning of Period | 149.1 |
| | 84.4 |
|
Cash and Cash Equivalents, End of Period | $ | 196.5 |
| | $ | 118.6 |
|
Supplemental Disclosure of Cash Flow Information: | | | |
Cash Paid for: | | | |
Income Taxes, Net of Refunds | $ | 62.3 |
| | $ | 52.5 |
|
Interest | $ | 19.5 |
| | $ | 12.4 |
|
The accompanying notes are an integral part of the unaudited consolidated financial statements.
The Dun & Bradstreet Corporation Consolidated Statements of Shareholders’ Equity (Deficit) (Unaudited) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | For the Six Months Ended June 30, 2013 and 2012 | | | | |
| | | | | | | | | (Amounts in millions) | | | | | | | | |
| Common Stock ($0.01 Par Value) | | Capital Surplus | | Retained Earnings | | Treasury Stock | | Cumulative Translation Adjustment | | Minimum Pension Liability Adjustment | | Derivative Financial Instrument | | Total D&B Shareholders’ Equity (Deficit) | | Noncontrolling Interest | | Total Equity (Deficit) |
Balance, December 31, 2011 | $ | 0.8 |
| | $ | 239.0 |
| | $ | 2,179.3 |
| | $ | (2,356.3 | ) | | $ | (168.3 | ) | | $ | (638.4 | ) | | $ | — |
| | $ | (743.9 | ) | | $ | 3.7 |
| | $ | (740.2 | ) |
Net Income | — |
| | — |
| | 119.9 |
| | — |
| | — |
| | — |
| | — |
| | 119.9 |
| | 0.7 |
| | 120.6 |
|
Payment to Noncontrolling Interest | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (0.2 | ) | | (0.2 | ) |
Sale of Noncontrolling Interest | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (0.3 | ) | | (0.3 | ) |
Equity-Based Plans | — |
| | 20.8 |
| | — |
| | 14.0 |
| | — |
| | — |
| | — |
| | 34.8 |
| | — |
| | 34.8 |
|
Treasury Shares Acquired | — |
| | — |
| | — |
| | (204.0 | ) | | — |
| | — |
| | — |
| | (204.0 | ) | | — |
| | (204.0 | ) |
Pension Adjustments, net of tax of $3.2 | — |
| | — |
| | — |
| | — |
| | — |
| | 8.6 |
| | — |
| | 8.6 |
| | — |
| | 8.6 |
|
Dividend Declared | — |
| | — |
| | (35.9 | ) | | — |
| | — |
| | — |
| | — |
| | (35.9 | ) | | — |
| | (35.9 | ) |
Adjustments to Legacy Tax Matters | — |
| | 1.6 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 1.6 |
| | — |
| | 1.6 |
|
Change in Cumulative Translation Adjustment | — |
| | — |
| | — |
| | — |
| | (7.6 | ) | | — |
| | — |
| | (7.6 | ) | | (0.1 | ) | | (7.7 | ) |
Derivative Financial Instruments, no tax impact | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 0.8 |
| | 0.8 |
| | — |
| | 0.8 |
|
Balance, June 30, 2012 | $ | 0.8 |
| | $ | 261.4 |
| | $ | 2,263.3 |
| | $ | (2,546.3 | ) | | $ | (175.9 | ) | | $ | (629.8 | ) | | $ | 0.8 |
| | $ | (825.7 | ) | | $ | 3.8 |
| | $ | (821.9 | ) |
| | | | | | | | | | | | | | | | | | | |
Balance, December 31, 2012 | $ | 0.8 |
| | $ | 261.7 |
| | $ | 2,405.5 |
| | $ | (2,833.3 | ) | | $ | (151.2 | ) | | $ | (701.0 | ) | | $ | 0.1 |
| | $ | (1,017.4 | ) | | $ | 3.1 |
| | $ | (1,014.3 | ) |
Net Income | — |
| | — |
| | 110.4 |
| | — |
| | — |
| | — |
| | — |
| | 110.4 |
| | 1.6 |
| | 112.0 |
|
Equity-Based Plans | — |
| | 5.9 |
| | — |
| | 49.1 |
| | — |
| | — |
| | — |
| | 55.0 |
| | — |
| | 55.0 |
|
Treasury Shares Acquired | — |
| | — |
| | — |
| | (283.1 | ) | | — |
| | — |
| | — |
| | (283.1 | ) | | — |
| | (283.1 | ) |
Pension Adjustments, net of tax of $5.5 | — |
| | — |
| | — |
| | — |
| | — |
| | 11.0 |
| | — |
| | 11.0 |
| | — |
| | 11.0 |
|
Dividend Declared | — |
| | — |
| | (32.3 | ) | | — |
| | — |
| | — |
| | — |
| | (32.3 | ) | | — |
| | (32.3 | ) |
Change in Cumulative Translation Adjustment | — |
| | — |
| | — |
| | — |
| | (36.7 | ) | | — |
| | — |
| | (36.7 | ) | | — |
| | (36.7 | ) |
Balance, June 30, 2013 | $ | 0.8 |
| | $ | 267.6 |
| | $ | 2,483.6 |
| | $ | (3,067.3 | ) | | $ | (187.9 | ) | | $ | (690.0 | ) | | $ | 0.1 |
| | $ | (1,193.1 | ) | | $ | 4.7 |
| | $ | (1,188.4 | ) |
The accompanying notes are an integral part of the unaudited consolidated financial statements.
THE DUN & BRADSTREET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(Tabular dollar amounts in millions, except per share data)
| |
Note 1 -- | Basis of Presentation |
These interim unaudited consolidated financial statements have been prepared in accordance with the instructions to the Quarterly Report on Form 10-Q. They should be read in conjunction with the consolidated financial statements and related notes, which appear in The Dun & Bradstreet Corporation’s (“D&B,” the "Company," “we” or “our”) Annual Report on Form 10-K for the year ended December 31, 2012. The unaudited consolidated results for interim periods do not include all disclosures required by accounting principles generally accepted in the United States of America (“GAAP”) for annual financial statements and are not necessarily indicative of results for the full year or any subsequent period. In the opinion of our management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair statement of the unaudited consolidated financial position, results of operations and cash flows at the dates and for the periods presented have been included.
All inter-company transactions have been eliminated in consolidation.
Effective January 1, 2013, we began managing and reporting our North America Risk Management Solutions set 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, within pre-defined ranges; |
| |
• | 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, within pre-defined ranges; 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.
The financial statements of the subsidiaries outside North America reflect results for the three month and six month periods ended May 31 in order to facilitate the timely reporting of our unaudited consolidated financial results and unaudited consolidated financial position.
Where appropriate, we have reclassified certain prior year amounts to conform to the current year presentation due to the changes in solution sets discussed above.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)-continued
(Tabular dollar amounts in millions, except per share data)
| |
Note 2 -- | Recent Accounting Pronouncements |
In July 2013, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2013-11, "Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists (a consensus of the Emerging Issues Task Force)," which states that an unrecognized tax benefit, or a portion of an unrecognized tax benefit, should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward. If a company does not have: (i) a net operating loss carryforward; (ii) a similar tax loss; or (iii) a tax credit carryforward is not available at the reporting date under the tax law of the applicable jurisdiction to settle any additional income taxes that would result from the disallowance of a tax position or the entity does not intend to use the deferred tax asset for such purpose, the unrecognized tax benefit should be presented in the financial statements as a liability and should not be combined with deferred tax assets. The authoritative guidance is effective for fiscal years and the interim periods within those fiscal years beginning on or after December 15, 2013 and should be applied on a prospective basis. We do not expect that the adoption of this authoritative guidance will have a material impact on our consolidated financial statements.
In July 2013, the FASB issued ASU No. 2013-10, "Derivatives and Hedging (Topic 815): Inclusion of the Fed Funds Effective Swap Rate (or Overnight Index Swap Rate) as a Benchmark Interest Rate for Hedge Accounting Purposes (a consensus of the Emerging Issues Task Force)," which permits a company to designate the Fed Funds Effective Swap Rate ("Fed Funds rate"), also referred to as the overnight index swap rate ("OIS"), as a benchmark interest rate for hedge accounting purposes. In addition, the ASU removes the restriction on using different benchmark interest rates for similar hedges. The authoritative guidance is effective prospectively for qualifying new or redesignated hedging relationships entered into on or after July 17, 2013. We do not expect that the adoption of this authoritative guidance will have a material impact on our consolidated financial statements.
In March 2013, the FASB issued ASU No. 2013-5, "Foreign Currency Matters (Topic 830): Parent’s Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity (a consensus of the FASB Emerging Issues Task Force)," which states that a cumulative translation adjustment ("CTA") is attached to the parent’s investment in a foreign entity and should be released in a manner consistent with the derecognition guidance on investments in entities. The entire amount of the CTA associated with the foreign entity would be released when there has been a: (i) sale of a subsidiary or group of net assets within a foreign entity and the sale represents the substantially complete liquidation of the investment in the foreign entity; (ii) loss of a controlling financial interest in an investment in a foreign entity; and (iii) step acquisition for a foreign entity. The authoritative guidance does not change the requirement to release a pro rata portion of the CTA of the foreign entity into earnings for a partial sale of an equity method investment in a foreign entity. The authoritative guidance is effective for fiscal years and the interim periods within those fiscal years beginning on or after December 15, 2013 and should be applied on a prospective basis. We do not expect that the adoption of this authoritative guidance will have a material impact on our consolidated financial statements.
In February 2013, the FASB issued ASU No. 2013-02, "Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income." The authoritative guidance adds new disclosure requirements for items reclassified out of accumulated other comprehensive income. A company would disaggregate the total change of each component of other comprehensive income and separately present reclassification adjustments and current-period other comprehensive income. The authoritative guidance requires a company to present information about significant items reclassified out of accumulated other comprehensive income by component either on the face of the statement where net income is presented or as a separate disclosure in the notes to the financial statements. The authoritative guidance is effective for fiscal years and the interim periods within those annual periods beginning after December 15, 2012. The authoritative guidance should be applied prospectively. See Note 12 to our unaudited consolidated financial statements included in this Quarterly Report on Form 10-Q for more information.
In January 2013, the FASB issued ASU No. 2013-01, "Balance Sheet (Topic 210): Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities," which clarifies which instruments and transactions are subject to the offsetting disclosure requirements established by ASU No. 2011-11, “Balance Sheet (Topic 210); Disclosures about Offsetting Assets and Liabilities” or “ASU No. 2011-11.” The authoritative guidance limits the scope of the offsetting disclosures to (i) recognized derivative instruments accounted for in accordance with ASC 815, “Derivatives and Hedging”, or “ASC 815,” subject to the authoritative guidance for offsetting in the statement of financial position and (ii) recognized derivative instruments accounted for in accordance with ASC 815 that are subject to an enforceable master netting arrangement or similar agreement. The authoritative guidance is effective for annual reporting periods beginning on or after January 1, 2013 and interim periods within those annual periods. A company is required to provide the disclosures required in ASU No. 2011-11 for the applicable
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)-continued
(Tabular dollar amounts in millions, except per share data)
instruments and transactions under this authoritative guidance retrospectively for all comparative periods presented. The adoption of this authoritative guidance did not have a material impact on our consolidated financial statements.
In July 2012, the FASB issued ASU No. 2012-02, “Intangibles - Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment.” The amendments in this ASU allow a company to qualitatively assess whether indefinite-lived intangible assets are more likely than not impaired. If the indefinite-lived intangible assets are considered impaired, a company is required to perform the quantitative test under ASC 350-30, “Intangibles - Goodwill and Other - General Intangibles Other than Goodwill.” The authoritative guidance does not amend the requirement to test indefinite-lived intangible assets annually for impairment. In addition, the authoritative guidance does not amend the requirement to test these assets for impairment between annual tests if there is a change in events or circumstances. The authoritative guidance is effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. The adoption of this authoritative guidance did not have a material impact on our consolidated financial statements.
In December 2011, the FASB issued ASU No. 2011-11. The amendments in this ASU require a company to disclose information about offsetting and related arrangements to enable users of its financial statements to understand the effect of those arrangements on its financial position. A company is required to apply the amendments for annual reporting periods beginning on or after January 1, 2013 and interim periods within those annual periods. A company should provide the disclosures required by those amendments retrospectively for all comparative periods presented. The adoption of this authoritative guidance did not have a material impact on our consolidated financial statements.
Note 3 -- 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 Accounting Standards Codification (“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.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)-continued
(Tabular dollar amounts in millions, except per share data)
Three Months Ended June 30, 2013 vs. Three Months Ended June 30, 2012
During the three months ended June 30, 2013, we recorded a $2.2 million restructuring charge. The significant components of this charge included:
| |
• | Severance and termination costs of $2.1 million in accordance with the provisions of ASC 712-10 were recorded. Approximately 20 employees were impacted. Of these 20 employees, approximately 15 employees exited the Company in the second quarter of 2013, with the remaining primarily to exit in the third quarter of 2013. The cash payments for these employees will be substantially completed by the fourth quarter of 2013; and |
| |
• | Lease termination obligations, other exit costs including those to consolidate or close facilities and asset impairments of $0.1 million. |
During the three months ended June 30, 2012, we recorded a $9.3 million restructuring charge. The significant components of this charge included:
| |
• | Severance and termination costs of $8.1 million and $1.1 million in accordance with the provisions of ASC 712-10 and ASC 420-10, respectively, were recorded. Approximately 500 employees were impacted. Of these 500 employees, approximately 435 employees exited the Company in the second quarter of 2012, with the remaining primarily having exited in the second half of 2012. The cash payments for these employees were substantially completed by the fourth quarter of 2012; and |
| |
• | Lease termination obligations, other costs to consolidate or close facilities and other exit costs of $0.1 million. |
Six Months Ended June 30, 2013 vs. Six Months Ended June 30, 2012
During the six months ended June 30, 2013, we recorded a $4.5 million restructuring charge. The significant components of this charge included:
| |
• | Severance and termination costs of $2.7 million in accordance with the provisions of ASC 712-10 were recorded. Approximately 65 employees were impacted. Of these 65 employees, approximately 50 employees exited the Company in the first half of 2013, with the remaining to exit in the second half of 2013. The cash payments for these employees will be substantially completed by the fourth quarter of 2013; and |
| |
• | Lease termination obligations, other costs to consolidate or close facilities and other exit costs of $1.8 million. |
During the six months ended June 30, 2012, we recorded an $18.4 million restructuring charge. The significant components of this charge included:
| |
• | Severance and termination costs of $11.2 million and $4.7 million in accordance with the provisions of ASC 712-10 and ASC 420-10, respectively, were recorded. Approximately 620 employees were impacted. Of these 620 employees, approximately 555 employees exited the Company in the first half of 2012, with the remaining primarily having exited in the second half of 2012. The cash payments for these employees were substantially completed by the fourth quarter of 2012; and |
| |
• | Lease termination obligations, other costs to consolidate or close facilities and other exit costs of $2.5 million. |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)-continued
(Tabular dollar amounts in millions, except per share data)
The following tables set forth, in accordance with ASC 712-10 and/or ASC 420-10, the restructuring reserves and utilization related to our Financial Flexibility initiatives:
|
| | | | | | | | | | | |
| Severance and Termination | | Lease Termination Obligations and Other Exit Costs | | Total |
Restructuring Charges: | | | | | |
Balance Remaining as of December 31, 2012 | $ | 9.4 |
| | $ | 2.3 |
| | $ | 11.7 |
|
Charge Taken during First Quarter 2013 | 0.6 |
| | 1.7 |
| | 2.3 |
|
Payments/Asset Impairment during First Quarter 2013 (1) | (3.7 | ) | | (0.8 | ) | | (4.5 | ) |
Balance Remaining as of March 31, 2013 | $ | 6.3 |
| | $ | 3.2 |
| | $ | 9.5 |
|
Charge Taken during Second Quarter 2013 | 2.1 |
| | 0.1 |
| | 2.2 |
|
Payments during Second Quarter 2013 | (3.0 | ) | | (0.4 | ) | | (3.4 | ) |
Balance Remaining as of June 30, 2013 | $ | 5.4 |
| | $ | 2.9 |
| | $ | 8.3 |
|
|
| | | | | | | | | | | |
| Severance and Termination | | Lease Termination Obligations and Other Exit Costs | | Total |
Restructuring Charges: | | | | | |
Balance Remaining as of December 31, 2011 | $ | 8.3 |
| | $ | 2.2 |
| | $ | 10.5 |
|
Charge Taken during First Quarter 2012 | 6.7 |
| | 2.4 |
| | 9.1 |
|
Payments during First Quarter 2012 | (4.0 | ) | | (1.0 | ) | | (5.0 | ) |
Balance Remaining as of March 31, 2012 | $ | 11.0 |
| | $ | 3.6 |
| | $ | 14.6 |
|
Charge Taken during Second Quarter 2012 | 9.2 |
| | 0.1 |
| | 9.3 |
|
Payments during Second Quarter 2012 | (7.5 | ) | | (0.8 | ) | | (8.3 | ) |
Balance Remaining as of June 30, 2012 | $ | 12.7 |
| | $ | 2.9 |
| | $ | 15.6 |
|
(1) We incurred an asset impairment of $0.5 million in the first quarter of 2013 related to the termination of a lease.
| |
Note 4 -- | Notes Payable and Indebtedness |
Our borrowings are summarized in the following table:
|
| | | | | | | |
| June 30, 2013 | | December 31, 2012 |
Debt Maturing Within One Year: | | | |
Other | 0.1 |
| | 0.2 |
|
Total Debt Maturing Within One Year | $ | 0.1 |
| | $ | 0.2 |
|
Debt Maturing After One Year: | | | |
Long-Term Fixed-Rate Notes (Net of a $3.3 million and $3.5 million discount as of June 30, 2013 and December 31, 2012, respectively) | $ | 1,046.7 |
| | $ | 1,046.5 |
|
Fair Value Adjustment Related to Hedged Debt | 3.2 |
| | 3.8 |
|
Credit Facility | 358.0 |
| | 240.2 |
|
Other | 0.1 |
| | 0.2 |
|
Total Debt Maturing After One Year | $ | 1,408.0 |
| | $ | 1,290.7 |
|
Fixed-Rate Notes
In December 2012, we issued senior notes with a face value of $450 million that mature on December 1, 2017 (the "2017 notes”), bearing interest at a fixed annual rate of 3.25%, payable semi-annually. In addition, in December 2012, we issued senior notes with a face value of $300 million that mature on December 1, 2022 (the “2022 notes”), bearing interest at a fixed
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)-continued
(Tabular dollar amounts in millions, except per share data)
annual rate of 4.375%, payable semi-annually. The proceeds were used in December 2012 to repay borrowings outstanding under our revolving credit facility and retire our then outstanding $400 million senior notes bearing interest at a fixed annual rate of 6.00%, which had a maturity date of April 2013 (the “2013 notes”). In connection with the redemption of the 2013 notes, we recorded a premium payment of $5.4 million to “Other Income (Expense)—Net” in the consolidated statement of operations and comprehensive income during the year ended December 31, 2012. The interest rates applicable to the 2017 notes and 2022 notes are subject to adjustment if our debt rating is decreased three levels below the Standard & Poor's and Fitch BBB+ credit ratings that we held on the date of issuance. After a rate adjustment, if our debt ratings are subsequently upgraded, the adjustment(s) would reverse. The maximum adjustment is 2.00% above the initial interest rate and the rate cannot adjust below the respective fixed interest rates of the notes, that being 3.25% and 4.375% for the 2017 notes and 2022 notes, respectively. As of June 30, 2013, no such adjustments to the interest rates were required. The 2017 notes and 2022 notes carrying amounts of $450.0 million and $297.2 million, net of less than $0.1 million and $2.8 million of remaining issuance discounts, respectively, are recorded as “Long-Term Debt” in our unaudited consolidated balance sheet at June 30, 2013.
The 2017 notes and 2022 notes were issued at discounts of less than $0.1 million and $2.9 million, respectively. In addition, in connection with the issuance, we incurred underwriting and other fees of approximately $3.4 million and $2.5 million for the 2017 notes and 2022 notes, respectively. These costs are being amortized over the life of the applicable notes. The 2017 notes and 2022 notes contain certain covenants that limit our ability to create liens, enter into sale and leaseback transactions and consolidate, merge or sell assets to another entity. The 2017 notes and 2022 notes do not contain any financial covenants.
On January 30, 2008, we entered into interest rate derivative transactions with an aggregate notional amount of $400 million. The objective of these hedges was to mitigate the variability of future cash flows from market changes in Treasury rates in anticipation of the issuance of the 2013 notes. These transactions were accounted for as cash flow hedges and, as such, changes in fair value of the hedges that took place through the date of the issuance of the 2013 notes were recorded in Accumulated Other Comprehensive Income (“AOCI”). In connection with the issuance of the 2013 notes, these interest rate derivative transactions were terminated, resulting in a loss and a payment of $8.5 million on March 28, 2008, the date of termination. The March 28, 2008 payment had been recorded in AOCI and has been amortized over the life of the 2013 notes. In connection with the redemption of the 2013 notes in December 2012, the remaining unamortized portion of the loss in the amount of $0.3 million was recorded to “Other Income (Expense) - Net” in the consolidated statement of operations and comprehensive income during the year ended December 31, 2012. In addition, with the redemption of the 2013 notes in December 2012, the remaining unamortized underwriting and other fees in the amount of $0.1 million was recorded to "Other Income (Expense) - Net" in the consolidated statement of operations and comprehensive income during the year ended December 31, 2012.
In November 2010, we issued senior notes with a face value of $300 million that mature on November 15, 2015 (the "2015 notes”), bearing interest at a fixed annual rate of 2.875%, payable semi-annually. The proceeds were used in December 2010 to repay our then outstanding $300 million senior notes, bearing interest at a fixed annual rate of 5.50%, which had a maturity date of March 15, 2011 (the “2011 notes”). In connection with the redemption of the 2011 notes, we recorded a premium payment of $3.7 million to “Other Income (Expense) - Net” in the consolidated statement of operations and comprehensive income during the year ended December 31, 2010. The 2015 notes of $299.5 million, net of $0.5 million remaining discount, are recorded as “Long-Term Debt” in our unaudited consolidated balance sheet at June 30, 2013.
The 2015 notes were issued at a discount of $1.1 million, and, in connection with the issuance, we incurred underwriting and other fees of approximately $2.5 million. These costs are being amortized over the life of the 2015 notes. The 2015 notes contain certain covenants that limit our ability to create liens, enter into sale and leaseback transactions and consolidate, merge or sell assets to another entity. The 2015 notes do not contain any financial covenants.
In November and December 2010, we entered into interest rate derivative transactions with aggregate notional amounts of $125 million. The objective of these hedges was to offset the change in fair value of the fixed rate 2015 notes attributable to changes in LIBOR. These transactions have been accounted for as fair value hedges. We have recognized the gain or loss on the derivative instruments, as well as the offsetting loss or gain on the hedged item, in “Other Income (Expense)—Net” in the consolidated statement of operations and comprehensive income.
In March 2012, in connection with our objective to manage exposure to interest rate changes and our policy to manage our fixed and floating-rate debt mix, these interest rate derivatives discussed in the previous paragraph were terminated. This resulted in a gain of $0.3 million and the receipt of $5.0 million in cash on March 12, 2012, the swap termination settlement date. The gain of $0.3 million was recorded in “Other Income (Expense)—Net” in the consolidated statement of operations and comprehensive income during the year ended December 31, 2012.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)-continued
(Tabular dollar amounts in millions, except per share data)
Approximately $0.8 million of derivative gains offset by a $0.5 million loss on the fair value adjustment related to the hedged debt were recorded through the date of termination in the results for the three months ended March 31, 2012. The $4.9 million adjustment in the carrying amount of the hedged debt at the date of termination will be amortized as an offset to “Interest Expense” in the consolidated statement of operations and comprehensive income over the remaining term of the 2015 notes. Approximately $0.6 million of amortization was recorded during the six months ended June 30, 2013, resulting in a balance of $3.2 million in our unaudited consolidated balance sheet at June 30, 2013.
Credit Facility
At June 30, 2013 and December 31, 2012, we had an $800 million, revolving credit facility, which expires in October 2016. Borrowings under the $800 million revolving credit facility are available at prevailing short-term interest rates. The facility requires the maintenance of interest coverage and total debt to Earnings Before Income Taxes, Depreciation and Amortization (“EBITDA”) ratios, which are defined in the credit agreement. We were in compliance with these revolving credit facility financial covenants at June 30, 2013 and December 31, 2012.
At June 30, 2013 and December 31, 2012, we had $358.0 million and $240.2 million, respectively, of borrowings outstanding under the $800 million revolving credit facility with weighted average interest rates of 1.30% and 1.62%, respectively. We borrowed under this facility from time-to-time during the six months ended June 30, 2013 to supplement the timing of receipts in order to fund our working capital and share repurchases. The $800 million revolving credit facility also supports our commercial paper program which was increased from $300 million to $800 million during July 2012. Under this program, we may issue from time-to-time unsecured promissory notes in the commercial paper market in private placements exempt from registration under the Securities Act of 1933, as amended, for a cumulative face amount not to exceed $800 million outstanding at any one time and with maturities not exceeding 364 days from the date of issuance. Outstanding commercial paper effectively reduces the amount available for borrowing under the $800 million revolving credit facility. We did not borrow under our commercial paper program during the six months ended June 30, 2013 or 2012.
Other
At June 30, 2013 and December 31, 2012, certain of our international operations had uncommitted lines of credit of $2.9 million and $3.0 million, respectively. There were no borrowings outstanding under these lines of credit at June 30, 2013 and December 31, 2012, respectively. These arrangements have no material facility fees and no compensating balance requirements.
At June 30, 2013 and December 31, 2012, we were contingently liable under open standby letters of credit and bank guarantees issued by our banks in favor of third parties and parent guarantees in favor of certain of our banks totaling $5.3 million and $12.5 million, respectively.
Interest paid for all outstanding debt totaled $18.8 million and $19.5 million during the three month and six month periods ended June 30, 2013, respectively. In March 2012, we terminated our then outstanding interest rate derivatives that were intended to offset the change in fair value of the fixed rate 2015 notes attributable to changes in LIBOR, resulting in the receipt of $5.0 million in cash on the date of termination. This resulted in a net interest received of $4.4 million for all outstanding debt for the three months ended March 31, 2012. Interest paid for all outstanding debt totaled $16.8 million and $12.4 million during the three month and six month periods ended June 30, 2012, respectively.
| |
Note 5 -- | 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 Earnings Per Share (“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. We did not have any weighted average restricted shares outstanding for the three month and six month periods ended June 30, 2013, respectively. The number of weighted average restricted shares outstanding was 8,396 shares and 19,331 shares for the three month and six month periods ended June 30, 2012, respectively.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)-continued
(Tabular dollar amounts in millions, except per share data)
|
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2013 | | 2012 | | 2013 | | 2012 |
Net Income Attributable to D&B | $ | 57.5 |
| | $ | 56.5 |
| | $ | 110.4 |
| | $ | 119.9 |
|
Less: Allocation to Participating Securities | — |
| | — |
| | — |
| | — |
|
Net Income Attributable to D&B Common Shareholders – Basic and Diluted | $ | 57.5 |
| | $ | 56.5 |
| | $ | 110.4 |
| | $ | 119.9 |
|
Weighted Average Number of Shares Outstanding – Basic | 39.4 |
| | 46.7 |
| | 40.0 |
| | 47.2 |
|
Dilutive Effect of Our Stock Incentive Plans | 0.4 |
| | 0.3 |
| | 0.4 |
| | 0.4 |
|
Weighted Average Number of Shares Outstanding – Diluted | 39.8 |
| | 47.0 |
| | 40.4 |
| | 47.6 |
|
Basic Earnings Per Share of Common Stock Attributable to D&B Common Shareholders | $ | 1.46 |
| | $ | 1.21 |
| | $ | 2.76 |
| | $ | 2.54 |
|
Diluted Earnings Per Share of Common Stock Attributable to D&B Common Shareholders | $ | 1.44 |
| | $ | 1.20 |
| | $ | 2.73 |
| | $ | 2.52 |
|
Stock-based awards to acquire 185,095 shares and 1,470,565 shares of common stock were outstanding at the three months ended June 30, 2013 and 2012, respectively, but were not included in the computation of diluted earnings per share because the assumed proceeds, as calculated under the treasury stock method, resulted in these awards being anti-dilutive. Stock-based awards to acquire 616,988 shares and 1,377,458 shares of common stock were outstanding at the six months ended June 30, 2013 and 2012, respectively, but were not included in the computation of diluted earnings per share because the assumed proceeds, as calculated under the treasury stock method, resulted in these awards being anti-dilutive. Our options generally expire ten years from the grant date.
Our share repurchases were as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the Three Months Ended June 30, | | For the Six Months Ended June 30, |
Program | | 2013 | | 2012 | | 2013 | | 2012 |
| | Shares | | $ Amount | | Shares | | $ Amount | | Shares | | $ Amount | | Shares | | $ Amount |
| | (Dollar amounts in millions) | | (Dollar amounts in millions) |
Share Repurchase Programs (a) | | 1,093,594 |
|
| $ | 100.1 |
| | 2,968,703 |
|
| $ | 200.0 |
| | 2,517,131 |
|
| $ | 215.1 |
| | 2,968,703 |
|
| $ | 200.0 |
|
Repurchases to Mitigate the Dilutive Effect of the Shares Issued Under Our Stock Incentive Plans and Employee Stock Purchase Plan (“ESPP”) (b) | | 632,322 |
|
| 62.0 |
| | 59,563 |
|
| 4.0 |
| | 706,637 |
|
| 68.0 |
| | 59,563 |
|
| 4.0 |
|
Total Repurchases | | 1,725,916 |
| | $ | 162.1 |
| | 3,028,266 |
| | $ | 204.0 |
| | 3,223,768 |
| | $ | 283.1 |
| | 3,028,266 |
| | $ | 204.0 |
|
| |
(a) | In August 2012, our Board of Directors approved a $500 million increase to our existing $500 million share repurchase program, for a total program authorization of $1 billion. The then existing $500 million program was announced in October 2011 and commenced in November 2011 upon completion of our then existing $200 million share repurchase program. We anticipate that this program will be completed by mid-2014. |
| |
(b) | In May 2010, our Board of Directors approved a four-year, five million share repurchase program to mitigate the dilutive effect of the shares issued under our stock incentive plans and ESPP. This program commenced in October 2010 and expires in October 2014. |
Note 6 -- Other Accrued and Current Liabilities
|
| | | | | | | |
| June 30, 2013 | | December 31, 2012 |
Restructuring Accruals | $ | 8.3 |
| | $ | 11.7 |
|
Professional Fees | 36.4 |
| | 37.4 |
|
Operating Expenses | 26.0 |
| | 28.9 |
|
Other Accrued Liabilities (1) | 53.3 |
| | 40.9 |
|
| $ | 124.0 |
| | $ | 118.9 |
|
| |
(1) | The increase in Other Accrued Liabilities was primarily attributed to the purchase of perpetual licenses of third party software. |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)-continued
(Tabular dollar amounts in millions, except per share data)
Note 7 -- Contingencies
We are involved in tax and legal proceedings, claims and litigation arising in the ordinary course of business for which we believe that we have adequate reserves, and such reserves are not material to our consolidated financial statements. We record a liability when management believes that it is both probable that a liability has been incurred and we can reasonably estimate the amount of the loss. For such matters where management believes a liability is not probable but is reasonably possible, a liability is not recorded; instead, an estimate of loss or range of loss, if material individually or in the aggregate, is disclosed if reasonably estimable, or a statement will be made that an estimate of loss cannot be made. Once we have disclosed a matter that we believe is or could be material to us, we continue to report on such matter until there is finality of outcome or until we determine that disclosure is no longer warranted. Further, we believe our estimate of the aggregate range of reasonably possible losses, in excess of established reserves, for our legal proceedings was not material at June 30, 2013. In addition, from time-to-time, we may be involved in additional matters, which could become material and for which we may also establish reserve amounts, as discussed below.
China Operations
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 and certain other laws in our China operations. As previously reported, we have voluntarily contacted the Securities and Exchange Commission and the United States Department of Justice to advise both agencies of our investigation. Our investigation remains ongoing and is being conducted at the direction of the Audit Committee.
During the six months ended June 30, 2013, we incurred $5.3 million of legal and other professional fees related to matters in China. Additionally, during the year ended December 31, 2012, we incurred $13.5 million of legal and other professional fees 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. For the year ended December 31, 2012, the Roadway business had $5.4 million of revenue and $14.5 million of operating loss. 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 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 former Roadway employees. A fifth former Roadway employee was separated from the case.
As our investigation is ongoing, we cannot yet predict the ultimate outcome of the matter or its impact, if any, on our business, financial condition or results of operations. No amount in respect of any potential liability in this matter, including for penalties, fines or other sanctions, has been accrued in our consolidated financial statements.
Nicholas Martin v. Dun & Bradstreet, Inc. and Convergys Customer Management Group, Inc., No. 12 CV 215 (USDC N.D. IL.)
On January 11, 2012, Nicholas Martin filed suit against Dun & Bradstreet, Inc. and Convergys Customer Management Group, Inc. ("Convergys") in the United States District Court for the Northern District of Illinois. The complaint alleges that Defendants violated the Telephone Consumer Protection Act (“TCPA”) because Convergys placed a telephone call to Plaintiff's cell phone using an automatic telephone dialing system ("ATDS") and because Dun & Bradstreet, Inc. authorized the telephone call. The TCPA generally prohibits the use of an ATDS to place a call to a cell phone for nonemergency purposes and without the prior express consent of the called party. The TCPA provides for statutory damages of $500 per violation, which may be trebled to $1,500 per violation at the discretion of the court if the plaintiff proves the defendant willfully violated the TCPA. Plaintiff sought to bring this action as a class action on behalf of all persons who Defendants called on their cell phone using an ATDS, where the Defendants obtained the cell phone number from some source other than directly from the called party, during the period January 11, 2010, to the present. The parties reached an agreement to settle this matter and they have negotiated the terms of a settlement agreement and other related settlement documents. On July 16, 2013 the Court granted Plaintiff's Motion for Preliminary Approval of Class Action Settlement and entered a Preliminary Approval Order. Notice to class members was mailed on July 31, 2013, and class members have until October 7, 2013 to submit claims, which are subject to Defendants' review. The settlement is subject to final approval by the Court. The Court
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)-continued
(Tabular dollar amounts in millions, except per share data)
scheduled a Final Approval Hearing for November 19, 2013. In accordance with ASC 450, "Contingencies," as of June 30, 2013, a reserve has been accrued by the company in this matter, which is reflected in our consolidated financial statements. The amount of such reserve is not material to the company's financial statements and an estimate of the additional loss or range of loss cannot be made.
O&R Construction, LLC v. Dun & Bradstreet Credibility Corporation, et al., No. 2:12 CV 02184 (USDC W.D. Wash.)
On December 13, 2012, plaintiff O&R Construction LLC filed a putative class action in the United States District Court for the Western District of Washington against D&B and an unaffiliated entity. The complaint alleges, among other things, that defendants violated the antitrust laws, used deceptive marketing practices to sell the CreditBuilder credit monitoring products and allegedly misrepresented the nature, need and value of the products. The plaintiff purports to sue on behalf of a putative class of purchasers of CreditBuilder and seeks recovery of damages and equitable relief. On February 18, 2013, the Company filed a motion to dismiss the complaint. On April 5, 2013, plaintiff filed an amended complaint in lieu of responding to the motion. The amended complaint dropped the antitrust claims and retained the class action and deceptive practices allegations. The Company filed a new motion to dismiss the amended complaint on May 3, 2013. The Court has not yet ruled on this motion and has set August 23, 2013 as a hearing date for oral argument. The parties exchanged initial disclosures and completed the initial case management process in March 2013. Formal discovery has begun and is in an early stage. This litigation is at a very preliminary stage. In accordance with ASC 450," Contingencies," we do not have sufficient information upon which to determine that a loss in connection with this matter is probable, reasonably possible or estimable, and thus no reserve has been established nor has a range of loss been disclosed. The Company disputes the allegations and intends to vigorously defend the case.
Other Matters
In addition, in the normal course of business, and including without limitation, our merger and acquisition activities and financing transactions, D&B indemnifies other parties, including customers, lessors and parties to other transactions with D&B, with respect to certain matters. D&B has agreed to hold the other parties harmless against losses arising from a breach of representations or covenants, or arising out of other claims made against certain parties. These agreements may limit the time within which an indemnification claim can be made and the amount of the claim. D&B has also entered into indemnity obligations with its officers and directors.
Additionally, in certain circumstances, D&B issues guarantee letters on behalf of our wholly-owned subsidiaries for specific situations. It is not possible to determine the maximum potential amount of future payments under these indemnification agreements due to the limited history of prior indemnification claims and the unique facts and circumstances involved in each particular agreement. Historically, payments made by D&B under these agreements have not had a material impact on our consolidated financial statements.
Note 8 -- Income Taxes
For the three months ended June 30, 2013, our effective tax rate was 31.4% as compared to 30.2% for the three months ended June 30, 2012. For the three months ended June 30, 2013, our effective tax rate was positively impacted by a benefit recorded as a result of a state tax refund received. For the three months ended June 30, 2012, our effective tax rate was positively impacted by an incremental benefit recorded for the divestiture of the domestic portion of our Japan operations and by a benefit recorded as a result of a change to state apportionment. For the three months ended June 30, 2013, there are no changes in our effective tax rate that either have had or that we expect may reasonably have a material impact on our operations or future performance.
For the six months ended June 30, 2013, our effective tax rate was 31.2% as compared to 21.4% for the six months ended June 30, 2012. For the six months ended June 30, 2013, our effective tax rate was positively impacted primarily by the release of reserves for uncertain tax positions and a benefit for the reenactment of the U.S. research and development tax credit for 2012 and 2013 as part of the American Taxpayer Relief Act of 2012 signed into law in January 2013. For the six months ended June 30, 2012, our effective tax rate was positively impacted by a tax benefit on a loss on the tax basis of a legal entity and by tax benefits from the divestiture of the domestic portion of our Japan operations and negatively impacted by an impairment related to permanently ceasing operations of Roadway in China. For the six months ended June 30, 2013, there are no changes in our effective tax rate that either have had or that we expect may reasonably have a material impact on our operations or future performance.
The total amount of gross unrecognized tax benefits as of June 30, 2013 was $98.6 million. The amount of unrecognized tax benefits that, if recognized, would impact the effective tax rate is $93.0 million, net of tax benefits. During the three months
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)-continued
(Tabular dollar amounts in millions, except per share data)
ended June 30, 2013, we decreased our unrecognized tax benefits by $0.5 million, net of increases. The decrease is primarily related to adjustments to a prior year position for state taxes. During the six months ended June 30, 2013, we decreased our unrecognized tax benefits by $2.1 million, net of increases. The decrease is primarily due to the expiration of applicable statutes of limitation and settlements with taxing authorities. We anticipate that it is reasonably possible total unrecognized tax benefits will decrease by approximately $62 million within the next twelve months as a result of the expiration of applicable statutes of limitation.
We or one of our subsidiaries file income tax returns in the U.S. federal, and various state, local and foreign jurisdictions. In the U.S. federal jurisdiction, we are no longer subject to examination by the Internal Revenue Service ("IRS") for years prior to 2007. In state and local jurisdictions, with a few exceptions, we are no longer subject to examinations by tax authorities for years prior to 2008. In foreign jurisdictions, with a few exceptions, we are no longer subject to examinations by tax authorities for years prior to 2007.
The IRS is examining our 2007, 2008 and 2009 tax years. We expect the examination will be completed no later than the fourth quarter of 2013.
We recognize accrued interest expense related to unrecognized tax benefits in income tax expense. The total amount of interest expense recognized for the three month and six month periods ended June 30, 2013 was $0.6 million and $1.1 million, net of tax benefits, respectively, as compared to $0.8 million and $1.3 million, net of tax benefits, for the three month and six month periods ended June 30, 2012, respectively. The total amount of accrued interest as of June 30, 2013 was $9.1 million, net of tax benefits, as compared to $12.7 million, net of tax benefits, as of June 30, 2012.
Note 9 -- Pension and Postretirement Benefits
The following table sets forth the components of the net periodic cost (income) associated with our pension plans and our postretirement benefit obligations:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Pension Plans | | Postretirement Benefit Obligations |
| For the Three Months Ended June 30, | | For the Six Months Ended June 30, | | For the Three Months Ended June 30, | | For the Six Months Ended June 30, |
| 2013 | | 2012 | | 2013 | | 2012 | | 2013 | | 2012 | | 2013 | | 2012 |
Components of Net Periodic Cost (Income): | | | | | | | | | | | | | | | |
Service Cost | $ | 1.3 |
| | $ | 1.5 |
| | $ | 2.6 |
| | $ | 3.1 |
| | $ | 0.2 |
| | $ | 0.1 |
| | $ | 0.4 |
| | $ | 0.2 |
|
Interest Cost | 17.4 |
| | 18.8 |
| | 34.9 |
| | 37.5 |
| | 0.1 |
| | 0.2 |
| | 0.3 |
| | 0.4 |
|
Expected Return on Plan Assets | (23.4 | ) | | (24.9 | ) | | (46.9 | ) | | (49.7 | ) | | — |
| | — |
| | — |
| | — |
|
Amortization of Prior Service Cost (Credit) | 0.1 |
| | 0.1 |
| | 0.2 |
| | 0.2 |
| | (2.3 | ) | | (2.5 | ) | | (4.6 | ) | | (5.0 | ) |
Recognized Actuarial Loss (Gain) | 10.8 |
| | 8.9 |
| | 21.7 |
| | 17.7 |
| | (0.4 | ) | | (0.5 | ) | | (0.8 | ) | | (1.0 | ) |
Net Periodic Cost (Income) | $ | 6.2 |
| | $ | 4.4 |
| | $ | 12.5 |
| | $ | 8.8 |
| | $ | (2.4 | ) | | $ | (2.7 | ) | | $ | (4.7 | ) | | $ | (5.4 | ) |
We previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2012 that we expected to contribute $22.0 million to our U.S. Non-Qualified plans and non-U.S. pension plans and $5.0 million to our postretirement benefit plan for the year ended December 31, 2013. As of June 30, 2013, we have made contributions to our Non-Qualified U.S. and non-U.S. pension plans of $8.8 million and postretirement benefit plan of $1.2 million, respectively.
Note 10 -- Segment Information
The segments reported below are our segments for which separate financial information is available and upon which operating results are evaluated by management on a timely basis to assess performance and to allocate resources. We manage our operations and our results are reported under the following three segments:
| |
• | 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 |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)-continued
(Tabular dollar amounts in millions, except per share data)
| |
• | Europe and Other International Markets (which primarily consists of operations in the UK, the Netherlands, Belgium, Latin America and European Worldwide Network). |
Our customer solution sets are D&B Risk Management Solutions™ and D&B Sales & Marketing Solutions™. Inter-segment sales are immaterial, and no single customer accounted for 10% or more of our total revenue. For management reporting purposes, we evaluate business segment performance before restructuring charges and intercompany transactions because these charges are not a component of our ongoing income or expenses and may have a disproportionate positive or negative impact on the results of our ongoing underlying business.
|
| | | | | | | | | | | | | | | |
| For the Three Months Ended June 30, | | For the Six Months Ended June 30, |
| 2013 | | 2012 | | 2013 | | 2012 |
Revenue: | | | | | | | |
North America | $ | 278.7 |
| | $ | 279.0 |
| | $ | 561.9 |
| | $ | 564.5 |
|
Asia Pacific | 49.3 |
| | 46.4 |
| | 90.7 |
| | 87.9 |
|
Europe and Other International Markets | 58.4 |
| | 58.3 |
| | 114.8 |
| | 115.7 |
|
Consolidated Core | 386.4 |
| | 383.7 |
| | 767.4 |
| | 768.1 |
|
Divested and Other Businesses | — |
| | 0.2 |
| | — |
| | 18.6 |
|
Consolidated Total | $ | 386.4 |
| | $ | 383.9 |
| | $ | 767.4 |
| | $ | 786.7 |
|
Operating Income (Loss): | | | | | | | |
North America | 84.5 |
| | 103.2 |
| | 170.5 |
| | 205.7 |
|
Asia Pacific | 8.4 |
| | 5.6 |
| | 10.8 |
| | (5.5 | ) |
Europe and Other International Markets | 15.7 |
| | 14.6 |
| | 29.7 |
| | 28.8 |
|
Total Segments | 108.6 |
| | 123.4 |
| | 211.0 |
| | 229.0 |
|
Corporate and Other (1) | (14.7 | ) | | (34.1 | ) | | (29.3 | ) | | (65.3 | ) |
Consolidated Total | 93.9 |
| | 89.3 |
| | 181.7 |
| | 163.7 |
|
Non-Operating Income (Expense), Net (2) | (9.7 | ) | | (9.0 | ) | | (20.6 | ) | | (11.4 | ) |
Income Before Provision for Income Taxes and Equity in Net Income of Affiliates | $ | 84.2 |
| | $ | 80.3 |
| | $ | 161.1 |
| | $ | 152.3 |
|
| |
(1) | The following table summarizes “Corporate and Other:” |
|
| | | | | | | | | | | | | | | |
| For the Three Months Ended June 30, | | For the Six Months Ended June 30, |
| 2013 | | 2012 | | 2013 | | 2012 |
Corporate Costs | $ | (8.8 | ) | | $ | (9.9 | ) | | $ | (19.5 | ) | | $ | (22.4 | ) |
Restructuring Expense | (2.2 | ) | | (9.3 | ) | | (4.5 | ) | | (18.4 | ) |
Strategic Technology Investment or MaxCV | — |
| | (10.5 | ) | | — |
| | (18.9 | ) |
Legal and Other Professional Fees and Shut-Down Costs Related to Matters in China | (3.7 | ) | | (4.4 | ) | | (5.3 | ) | | (5.6 | ) |
Total Corporate and Other | $ | (14.7 | ) | | $ | (34.1 | ) | | $ | (29.3 | ) | | $ | (65.3 | ) |
| |
(2) | The following table summarizes “Non-Operating Income (Expense):” |
|
| | | | | | | | | | | | | | | |
| For the Three Months Ended June 30, | | For the Six Months Ended June 30, |
| 2013 | | 2012 | | 2013 | | 2012 |
Interest Income | $ | 0.4 |
| | $ | 0.2 |
| | $ | 0.6 |
| | $ | 0.3 |
|
Interest Expense | (10.0 | ) | | (9.2 | ) | | (19.9 | ) | | (18.3 | ) |
Other Income (Expense) - Net | (0.1 | ) | | — |
| | (1.3 | ) | | 6.6 |
|
Non-Operating Income (Expense) - Net | $ | (9.7 | ) | | $ | (9.0 | ) | | $ | (20.6 | ) | | $ | (11.4 | ) |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)-continued
(Tabular dollar amounts in millions, except per share data)
Supplemental Geographic and Customer Solution Set Information:
|
| | | | | | | | | | | | | | | |
| For the Three Months Ended June 30, | | For the Six Months Ended June 30, |
| 2013 | | 2012 | | 2013 | | 2012 |
Customer Solution Set Revenue: | | | | | | | |
North America: | | | | | | | |
Risk Management Solutions | $ | 168.1 |
| | $ | 169.5 |
| | $ | 334.1 |
| | $ | 339.7 |
|
Sales & Marketing Solutions | 110.6 |
| | 109.5 |
| | 227.8 |
| | 224.8 |
|
North America Core Revenue | 278.7 |
| | 279.0 |
| | 561.9 |
| | 564.5 |
|
Divested and Other Businesses | — |
| | — |
| | — |
| | — |
|
Total North America Revenue | 278.7 |
| | 279.0 |
| | 561.9 |
| | 564.5 |
|
| | | | | | | |
Asia Pacific: | | | | | | | |
Risk Management Solutions | 42.6 |
| | 38.7 |
| | 78.2 |
| | 73.5 |
|
Sales & Marketing Solutions | 6.7 |
| | 7.7 |
| | 12.5 |
| | 14.4 |
|
Asia Pacific Core Revenue | 49.3 |
| | 46.4 |
| | 90.7 |
| | 87.9 |
|
Divested and Other Businesses (3) | — |
| | 0.2 |
| | — |
| | 18.6 |
|
Total Asia Pacific Revenue | 49.3 |
| | 46.6 |
| | 90.7 |
| | 106.5 |
|
| | | | | | | |
Europe and Other International Markets: | | | | | | | |
Risk Management Solutions | 48.6 |
| | 48.5 |
| | 94.9 |
| | 96.2 |
|
Sales & Marketing Solutions | 9.8 |
| | 9.8 |
| | 19.9 |
| | 19.5 |
|
Europe and Other International Markets Core Revenue | 58.4 |
| | 58.3 |
| | 114.8 |
| | 115.7 |
|
Divested and Other Businesses | — |
| | — |
| | — |
| | — |
|
Total Europe and Other International Markets Revenue | 58.4 |
| | 58.3 |
| | 114.8 |
| | 115.7 |
|
| | | | | | | |
Consolidated Total: | | | | | | | |
Risk Management Solutions | 259.3 |
| | 256.7 |
| | 507.2 |
| | 509.4 |
|
Sales & Marketing Solutions | 127.1 |
| | 127.0 |
| | 260.2 |
| | 258.7 |
|
Core Revenue | 386.4 |
| | 383.7 |
| | 767.4 |
| | 768.1 |
|
Divested and Other Businesses (3) | — |
| | 0.2 |
| | — |
| | 18.6 |
|
Consolidated Total Revenue | $ | 386.4 |
| | $ | 383.9 |
| | $ | 767.4 |
| | $ | 786.7 |
|
| |
(3) | During the fiscal year ended 2012, we: (a) completed the sales of: (i) the domestic portion of our Japanese operations to Tokyo Shoko Research Ltd. ("TSR Ltd."); and (ii) a research and advisory services business in India; and (b) the shut-down of our Roadway operations. These businesses have been classified as “Divested and Other Businesses.” These Divested and Other Businesses contributed less than 1% and 17% to our Asia Pacific total revenue for the three month and six month periods ended June 30, 2012, respectively. |
The following table represents Divested and Other Businesses revenue by solution set:
|
| | | | | | | | | | | | | | | |
| For the Three Months Ended June 30, | | For the Six Months Ended June 30, |
| 2013 | | 2012 | | 2013 | | 2012 |
Divested and Other Businesses: | | | | | | | |
Risk Management Solutions | $ | — |
| | $ | 0.2 |
| | $ | — |
| | $ | 9.2 |
|
Sales & Marketing Solutions | — |
| | — |
| | — |
| | 9.4 |
|
Total Divested and Other Businesses Revenue | $ | — |
| | $ | 0.2 |
| | $ | — |
| | $ | 18.6 |
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)-continued
(Tabular dollar amounts in millions, except per share data)
|
| | | | | | | |
| June 30, 2013 | | December 31, 2012 |
Assets: | | | |
North America (4) | $ | 737.6 |
| | $ | 795.4 |
|
Asia Pacific (5) | 389.6 |
| | 414.6 |
|
Europe and Other International Markets (6) | 374.9 |
| | 365.7 |
|
Total Segments | 1,502.1 |
| | 1,575.7 |
|
Corporate and Other (7) | 336.4 |
| | 416.1 |
|
Consolidated Total | $ | 1,838.5 |
| | $ | 1,991.8 |
|
Goodwill: | | | |
North America | $ | 265.4 |
| | $ | 266.5 |
|
Asia Pacific (8) | 217.8 |
| | 234.0 |
|
Europe and Other International Markets (8) | 107.8 |
| | 110.6 |
|
Consolidated Total | $ | 591.0 |
| | $ | 611.1 |
|
| |
(4) | The decrease in assets in the North America segment to $737.6 million at June 30, 2013 from $795.4 million at December 31, 2012 was primarily due to a decrease in accounts receivable partially offset by increases in cash and computer software. |
| |
(5) | The decrease in assets in the Asia Pacific segment to $389.6 million at June 30, 2013 from $414.6 million at December 31, 2012 was primarily due to the negative impact of foreign currency translation. |
| |
(6) | The increase in assets in the Europe and Other International Markets segment to $374.9 million at June 30, 2013 from $365.7 million at December 31, 2012 was primarily due to an increase in cash partially offset by a decrease in accounts receivable. |
| |
(7) | The decrease in assets in Corporate and Other to $336.4 million at June 30, 2013 from $416.1 million at December 31, 2012 was primarily due to a decrease in cash primarily due to bond interest and dividend payments. |
| |
(8) | The decrease in goodwill in the Asia Pacific segment to $217.8 million at June 30, 2013 from $234.0 million at December 31, 2012 was primarily due to the negative impact of foreign currency translation. The decrease in goodwill in the Europe and Other International Markets segment to $107.8 million at June 30, 2013 from $110.6 million at December 31, 2012 was primarily due to the negative impact of foreign currency translation. |
Note 11 -- Financial Instruments
We employ established policies and procedures to manage our exposure to changes in interest rates and foreign currencies. We use foreign exchange forward contracts to hedge short-term foreign currency denominated loans, investments and certain third-party and intercompany transactions. We may also use foreign exchange forward contracts to hedge our net investments in our foreign subsidiaries and foreign exchange option contracts to reduce the volatility that fluctuating foreign exchange rates may have on our international earnings streams. In addition, we may use interest rate derivatives to hedge a portion of the interest rate exposure on our outstanding debt or in anticipation of a future debt issuance, as discussed under “Interest Rate Risk Management” below.
We do not use derivative financial instruments for trading or speculative purposes. If a hedging instrument ceases to qualify as a hedge in accordance with hedge accounting guidelines, any subsequent gains and losses are recognized currently in income. Collateral is generally not required for these types of instruments.
By their nature, all such instruments involve risk, including the credit risk of non-performance by counterparties. However, at June 30, 2013 and December 31, 2012, there was no significant risk of loss in the event of non-performance of the counterparties to these financial instruments. We control our exposure to credit risk through monitoring procedures.
Our trade receivables do not represent a significant concentration of credit risk at June 30, 2013 and December 31, 2012, because we sell to a large number of customers in different geographical locations.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)-continued
(Tabular dollar amounts in millions, except per share data)
Interest Rate Risk Management
Our objective in managing exposure to interest rates is to limit the impact of interest rate changes on our earnings, cash flows and financial position, and to lower overall borrowing costs. To achieve these objectives, we maintain a policy that floating-rate debt be managed within a minimum and maximum range of our total debt exposure. To manage our exposure and limit volatility, we may use fixed-rate debt, floating-rate debt and/or interest rate swaps. We recognize all derivative instruments as either assets or liabilities at fair value in the statement of financial position.
Fair Value Hedges
For interest rate derivative instruments that are designated and qualify as a fair value hedge, we assess quarterly whether the interest rate swaps are highly effective in offsetting changes in the fair value of the hedged debt. Changes in fair values of interest rate swap agreements that are designated fair value hedges are recognized in earnings as an adjustment of “Other Income (Expense) - Net” in our unaudited consolidated statement of operations and comprehensive income. The effectiveness of the hedge is monitored on an ongoing basis for hedge accounting purposes, and if the hedge is considered ineffective, we discontinue hedge accounting prospectively.
In November 2010, we issued senior notes with a face value of $300 million that mature on November 15, 2015 (“the 2015 notes”). In November and December 2010, we entered into interest rate derivative transactions with aggregate notional amounts of $125 million. The objective of these hedges was to offset the change in fair value of the fixed rate 2015 notes attributable to changes in LIBOR. These transactions have been accounted for as fair value hedges. We have recognized the gain or loss on the derivative instruments, as well as the offsetting loss or gain on the hedged item, in “Other Income (Expense)—Net” in our consolidated statement of operations and comprehensive income.
In March 2012, in connection with our objective to manage exposure to interest rate changes and our policy to manage our fixed and floating-rate debt mix, the interest rate derivatives discussed in the previous paragraph were terminated. This resulted in a gain of $0.3 million and the receipt of $5.0 million in cash on March 12, 2012, the swap termination settlement date. The gain of $0.3 million was recorded in “Other Income (Expense)—Net” in the consolidated statement of operations and comprehensive income during the year ended December 31, 2012.
Approximately $0.8 million of derivative gains offset by a $0.5 million loss on the fair value adjustment related to the hedged debt were recorded through the date of termination in the results for the three months ended March 31, 2012. The $4.9 million adjustment in the carrying amount of the hedged debt at the date of termination will be amortized as an offset to “Interest Expense” in the consolidated statement of operations and comprehensive income over the remaining term of the 2015 notes. Approximately $0.6 million of amortization was recorded during the six months ended June 30, 2013, resulting in a balance of $3.2 million in our unaudited consolidated balance sheet at June 30, 2013.
Cash Flow Hedges
For interest rate derivative instruments that are designated and qualify as a cash flow hedge, the effective portion of the periodic hedge remeasurement gains or losses on the derivative are reported as a component of other comprehensive income and reclassified to earnings in the same period or periods during which the hedged transaction affects earnings. Gains and losses on the derivative representing either hedge ineffectiveness or hedge components excluded from the assessment of effectiveness are recognized in current earnings.
Foreign Exchange Risk Management
Our objective in managing exposure to foreign currency fluctuations is to reduce the volatility caused by foreign exchange rate changes on the earnings, cash flows and financial position of our global operations. We follow a policy of hedging balance sheet positions denominated in currencies other than the functional currency applicable to each of our various subsidiaries. In addition, we are subject to foreign exchange risk associated with our international earnings and net investments in our foreign subsidiaries. We use short-term, foreign exchange forward and option contracts to execute our hedging strategies. Typically, these contracts have maturities of 12 months or less. These contracts are denominated primarily in the British pound sterling, the Euro and Canadian dollar. The gains and losses on the forward contracts associated with the balance sheet positions are recorded in “Other Income (Expense) - Net” in our unaudited consolidated statement of operations and comprehensive income and are essentially offset by the losses and gains on the underlying foreign currency transactions.
As in prior years, we have hedged substantially all balance sheet positions denominated in a currency other than the functional currency applicable to each of our various subsidiaries with short-term, foreign exchange forward contracts. In addition, we may use foreign exchange option contracts to hedge certain foreign earnings streams and foreign exchange forward contracts to hedge certain
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)-continued
(Tabular dollar amounts in millions, except per share data)
net investment positions. The underlying transactions and the corresponding foreign exchange forward and option contracts are marked-to-market at the end of each quarter and the fair value impacts are reflected within our unaudited consolidated financial statements.
As of June 30, 2013 and 2012, the notional amounts of our foreign exchange contracts were $275.1 million and $258.5 million, respectively.
Fair Values of Derivative Instruments in the Consolidated Balance Sheet
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| | | | | | | | | | | | | | | | | | | | | | | |
| Asset Derivatives | | Liability Derivatives |
| June 30, 2013 | | December 31, 2012 | | June 30, 2013 | | December 31, 2012 |
| Balance Sheet Location | | Fair Value | | Balance Sheet Location | | Fair Value | | Balance Sheet Location | | Fair Value | | Balance Sheet Location | | Fair Value |
Derivatives not designated as hedging instruments | | | | | | | | | | | | | | | |
Foreign exchange forward contracts | Other Current Assets | | $ | 0.1 |
| | Other Current Assets | | $ | — |
| | Other Accrued & Current Liabilities | | $ | 0.5 |
| | Other Accrued & Current Liabilities | | $ | 0.4 |
|
Total derivatives not designated as hedging instruments | | | $ | 0.1 |
| | | | $ | — |
| | | | $ | 0.5 |
| | | | $ | 0.4 |
|
Total Derivatives | | | $ | 0.1 |
| | | | $ | — |
| | | | $ | 0.5 |
| | | | $ | 0.4 |
|
The Effect of Derivative Instruments on the Consolidated Statement of Operations and Comprehensive Income
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Gain or (Loss) Recognized in Income on Derivatives |
| Derivatives in Fair Value Hedging Relationships | Location | | For the Three Months Ended June 30, | | For the Six Months Ended June 30, | | Hedged Item | | Location | | For the Three Months Ended June 30, | | For the Six Months Ended June 30, |
|
| | | | 2013 | | 2012 | | 2013 | | 2012 | | | | | | 2013 | | 2012 | | 2013 | | 2012 |
| Interest rate contracts | Non-Operating Income (Expenses) – Net | | $ | — |
| | $ | — |
| | $ | — |
| | $ | 0.8 |
| | Fixed- rate debt | | Non-Operating Income (Expenses) – Net | | $ | — |
| | $ | — |
| | $ | — |
| | $ | (0.5 | ) |
Our foreign exchange forward and option contracts are not designated as hedging instruments under authoritative guidance.
The Effect of Derivative Instruments on the Consolidated Statement of Operations and Comprehensive Income
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| | | | | | | | | | | | | | | | | |
Derivatives not Designated as Hedging Instruments | Location of Gain or (Loss) Recognized in Income on Derivatives | | Amount of Gain or (Loss) Recognized in Income on Derivatives |
| | | For the Three Months Ended June 30, | | For the Six Months Ended June 30, |
| | | 2013 | | 2012 | | 2013 | | 2012 |
Foreign exchange forward contracts | Non-Operating Income (Expenses) – Net | | $ | 0.2 |
| | $ | (3.6 | ) | | $ | (5.2 | ) | | $ | 1.9 |
|
Foreign exchange option contracts | Non-Operating Income (Expenses) – Net | | $ | — |
| | $ | 0.1 |
| | $ | — |
| | $ | (0.1 | ) |
Fair Value of Financial Instruments
Our financial assets and liabilities that are reflected in the consolidated financial statements include derivative financial instruments, cash and cash equivalents, accounts receivable, other receivables, accounts payable, short-term borrowings and long-term borrowings. We use short-term foreign exchange forward contracts to hedge short-term foreign currency-denominated intercompany loans and certain third-party and intercompany transactions and we use foreign exchange option contracts to reduce the volatility that fluctuating foreign exchange rates may have on our international earnings streams. Fair value for derivative financial instruments is determined utilizing a market approach.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)-continued
(Tabular dollar amounts in millions, except per share data)
We have a process for determining fair values. Fair value is based upon quoted market prices, where available. If listed prices or quotes are not available, we use quotes from independent pricing vendors based on recent trading activity and other relevant information including market interest rate curves and referenced credit spreads.
In addition to utilizing external valuations, we conduct our own internal assessment of the reasonableness of the external valuations by utilizing a variety of valuation techniques including Black-Scholes option pricing and discounted cash flow models that are consistently applied. Inputs to these models include observable market data, such as yield curves, and foreign exchange rates where applicable. Our assessments are designed to identify prices that do not accurately reflect the current market environment, those that have changed significantly from prior valuations and other anomalies that may indicate that a price may not be accurate. We also follow established routines for reviewing and reconfirming valuations with the pricing provider, if deemed appropriate. In addition, the pricing provider has an established challenge process in place for all valuations, which facilitates identification and resolution of potentially erroneous prices. Valuation adjustments may be made to ensure that financial instruments are recorded at fair value. These adjustments include amounts to reflect counterparty credit quality and our own creditworthiness and constraints on liquidity. For inactive markets that do not have observable pricing or sufficient trading volumes, or for positions that are subject to transfer restrictions, valuations are adjusted to reflect illiquidity and/or non-transferability. Such adjustments are generally based on available market evidence. In the absence of such evidence, management's best estimate will be used.
The methods described above may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. Furthermore, while we believe our valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date.
The following table presents information about our assets and liabilities measured at fair value on a recurring basis as of June 30, 2013 and December 31, 2012, and indicates the fair value hierarchy of the valuation techniques utilized by us to determine such fair value. Level inputs, as defined by authoritative guidance, are as follows:
|
| |
Level Input: | Input Definition: |
Level I | Observable inputs utilizing quoted prices (unadjusted) for identical assets or liabilities in active markets at the measurement date. |
| |
Level II | Inputs other than quoted prices included in Level I that are either directly or indirectly observable for the asset or liability through corroboration with market data at the measurement date. |
| |
Level III | Unobservable inputs for the asset or liability in which little or no market data exists therefore requiring management’s best estimate of what market participants would use in pricing the asset or liability at the measurement date. |
In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the level in the fair value hierarchy within which the fair value measurement in its entirety falls has been determined based on the lowest level input that is significant to the fair value measurement in its entirety. Our assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the asset or liability.
The following table summarizes fair value measurements by level at June 30, 2013 for assets and liabilities measured at fair value on a recurring basis:
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| | | | | | | | | | | | | | | |
| Quoted Prices in Active Markets for Identical Assets (Level I) | | Significant Other Observable Inputs (Level II) | | Significant Unobservable Inputs (Level III) | | Balance at June 30, 2013 |
Assets: | | | | | | | |
Cash Equivalents (1) | $ | 87.2 |
| | $ | — |
| | $ | — |
| | $ | 87.2 |
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