2014 Q3 10-Q
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 September 30, 2014
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 September 30, 2014 |
Common Stock, | | 35,909,828 |
par value $0.01 per share | | |
THE DUN & BRADSTREET CORPORATION
INDEX TO FORM 10-Q
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| | Page |
| PART I. UNAUDITED FINANCIAL INFORMATION | |
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Item 1. | | |
| Consolidated Statements of Operations and Comprehensive Income for the Three Month and Nine Month Periods Ended September 30, 2014 and 2013 | |
| Consolidated Balance Sheets as of September 30, 2014 and December 31, 2013 | |
| Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2014 and 2013 | |
| Consolidated Statements of Shareholders’ Equity (Deficit) for the Nine Months Ended September 30, 2014 and 2013 | |
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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 2. | | |
Item 6. | | |
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PART I. UNAUDITED 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 | | Nine Months Ended |
| September 30, | | September 30, |
| 2014 | | 2013 | | 2014 | | 2013 |
| (Amounts in millions, except per share data) |
Revenue | $ | 417.1 |
| | $ | 411.1 |
| | $ | 1,192.0 |
| | $ | 1,178.5 |
|
Operating Expenses | 147.8 |
| | 131.9 |
| | 407.8 |
| | 388.2 |
|
Selling and Administrative Expenses | 154.5 |
| | 135.2 |
| | 460.2 |
| | 423.9 |
|
Depreciation and Amortization | 16.0 |
| | 17.4 |
| | 48.0 |
| | 53.6 |
|
Restructuring Charge | 2.0 |
| | 6.1 |
| | 11.9 |
| | 10.6 |
|
Operating Costs | 320.3 |
| | 290.6 |
| | 927.9 |
| | 876.3 |
|
Operating Income | 96.8 |
| | 120.5 |
| | 264.1 |
| | 302.2 |
|
Interest Income | 0.4 |
| | 0.3 |
| | 1.2 |
| | 0.9 |
|
Interest Expense | (10.9 | ) | | (10.3 | ) | | (32.3 | ) | | (30.2 | ) |
Other Income (Expense) - Net | (7.5 | ) | | (0.2 | ) | | (31.0 | ) | | (1.5 | ) |
Non-Operating Income (Expense) - Net | (18.0 | ) | | (10.2 | ) | | (62.1 | ) | | (30.8 | ) |
Income Before Provision for Income Taxes and Equity in Net Income of Affiliates | 78.8 |
| | 110.3 |
| | 202.0 |
| | 271.4 |
|
Less: Provision for Income Taxes (Benefit) | 11.4 |
| | 37.4 |
| | (0.7 | ) | | 87.6 |
|
Equity in Net Income of Affiliates | 1.0 |
| | 0.6 |
| | 2.6 |
| | 1.7 |
|
Net Income | 68.4 |
| | 73.5 |
| | 205.3 |
| | 185.5 |
|
Less: Net (Income) Loss Attributable to the Noncontrolling Interest | (0.9 | ) | | (0.7 | ) | | (2.6 | ) | | (2.3 | ) |
Net Income Attributable to D&B | $ | 67.5 |
| | $ | 72.8 |
| | $ | 202.7 |
| | $ | 183.2 |
|
Basic Earnings Per Share of Common Stock Attributable to D&B Common Shareholders | $ | 1.87 |
| | $ | 1.89 |
| | $ | 5.52 |
| | $ | 4.64 |
|
Diluted Earnings Per Share of Common Stock Attributable to D&B Common Shareholders | $ | 1.85 |
| | $ | 1.87 |
| | $ | 5.47 |
| | $ | 4.59 |
|
Weighted Average Number of Shares Outstanding-Basic | 36.1 |
| | 38.5 |
| | 36.7 |
| | 39.5 |
|
Weighted Average Number of Shares Outstanding-Diluted | 36.5 |
| | 38.9 |
| | 37.0 |
| | 39.9 |
|
Cash Dividend Paid Per Common Share | $ | 0.44 |
| | $ | 0.40 |
| | $ | 1.32 |
| | $ | 1.20 |
|
Other Comprehensive Income, Net of Tax | | | | | | | |
Net Income | $ | 68.4 |
| | $ | 73.5 |
| | $ | 205.3 |
| | $ | 185.5 |
|
Foreign Currency Translation Adjustments, no Tax Impact | (11.5 | ) | | (7.6 | ) | | (4.4 | ) | | (44.3 | ) |
Defined Benefit Pension Plans: | | | | | | | |
Prior Service Costs, Net of Tax Income (Expense) (1) | (0.8 | ) | | (1.4 | ) | | (1.2 | ) | | (4.3 | ) |
Net Actuarial Gain (Loss), Net of Tax Income (Expense) (2) | 3.4 |
| | 1.4 |
| | 14.7 |
| | 15.3 |
|
Derivative Financial Instruments, Net of Tax Income (Expense) (3) | — |
| | — |
| | (0.1 | ) | | — |
|
Comprehensive Income, Net of Tax | 59.5 |
| | 65.9 |
| | 214.3 |
| | 152.2 |
|
Less: Comprehensive (Income) Loss Attributable to the Noncontrolling Interest | (0.8 | ) | | (0.5 | ) | | (2.6 | ) | | (2.0 | ) |
Comprehensive Income Attributable to D&B | $ | 58.7 |
| | $ | 65.4 |
| | $ | 211.7 |
| | $ | 150.2 |
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(1) | Tax Income (Expense) of $0.4 million and $0.8 million during the three months ended September 30, 2014 and 2013, respectively. Tax Income (Expense) of $0.6 million and $2.3 million during the nine months ended September 30, 2014 and 2013, respectively. |
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(2) | Tax Income (Expense) of $(1.5) million and $(1.1) million during the three months ended September 30, 2014 and 2013, respectively. Tax Income (Expense) of $(7.5) million and $(8.1) million during the nine months ended September 30, 2014 and 2013, respectively. In addition, for the three month and nine month periods ended September 30, 2014 and 2013, there was an adjustment to our pension liabilities of $2.8 million and $5.5 million, net of income tax income(expense) of $1.4 million and $2.7 million, respectively, which is reflected in Accumulated Other Comprehensive Income. |
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(3) | Tax Income (Expense) of $(0.1) million during the nine months ended September 30, 2014. |
The accompanying notes are an integral part of the unaudited consolidated financial statements.
The Dun & Bradstreet Corporation Consolidated Balance Sheets (Unaudited) |
| | | | | | | |
| September 30, 2014 | | December 31, 2013 |
| (Amounts in millions, except per share data) |
ASSETS | | | |
Current Assets | | | |
Cash and Cash Equivalents | $ | 310.0 |
| | $ | 235.9 |
|
Accounts Receivable, Net of Allowance of $21.5 at September 30, 2014 and $23.9 at December 31, 2013 | 401.5 |
| | 518.5 |
|
Other Receivables | 6.5 |
| | 6.3 |
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Prepaid Taxes | 6.8 |
| | 9.1 |
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Deferred Income Tax | 17.3 |
| | 14.0 |
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Other Prepaids | 35.9 |
| | 30.3 |
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Other Current Assets | 7.4 |
| | 8.3 |
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Total Current Assets | 785.4 |
| | 822.4 |
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Non-Current Assets | | | |
Property, Plant and Equipment, Net of Accumulated Depreciation of $87.0 at September 30, 2014 and $83.9 at December 31, 2013 | 36.1 |
| | 39.6 |
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Computer Software, Net of Accumulated Amortization of $357.3 at September 30, 2014 and $474.1 at December 31, 2013 | 104.0 |
| | 107.9 |
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Goodwill | 594.6 |
| | 589.1 |
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Deferred Income Tax | 142.8 |
| | 148.4 |
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Other Receivables | 11.4 |
| | 45.6 |
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Other Intangibles | 67.9 |
| | 76.7 |
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Other Non-Current Assets | 47.0 |
| | 60.6 |
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Total Non-Current Assets | 1,003.8 |
| | 1,067.9 |
|
Total Assets | $ | 1,789.2 |
| | $ | 1,890.3 |
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LIABILITIES | | | |
Current Liabilities | | | |
Accounts Payable | $ | 39.0 |
| | $ | 41.4 |
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Accrued Payroll | 89.9 |
| | 86.4 |
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Accrued Income Tax | 1.4 |
| | 7.5 |
|
Short-Term Debt | 0.1 |
| | 0.1 |
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Other Accrued and Current Liabilities (Note 6) | 126.3 |
| | 116.1 |
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Deferred Revenue | 529.0 |
| | 600.8 |
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Total Current Liabilities | 785.7 |
| | 852.3 |
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Pension and Postretirement Benefits | 369.0 |
| | 394.1 |
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Long-Term Debt | 1,633.3 |
| | 1,516.0 |
|
Liabilities for Unrecognized Tax Benefits | 28.5 |
| | 108.0 |
|
Other Non-Current Liabilities | 56.1 |
| | 62.2 |
|
Total Liabilities | 2,872.6 |
| | 2,932.6 |
|
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 | — |
| | — |
|
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 |
|
Capital Surplus | 275.8 |
| | 270.0 |
|
Retained Earnings | 2,755.3 |
| | 2,600.9 |
|
Treasury Stock, at cost, 46.0 shares at September 30, 2014 and 44.1 shares at December 31, 2013 | (3,394.1 | ) | | (3,181.3 | ) |
Accumulated Other Comprehensive Income (Loss) | (729.8 | ) | | (738.8 | ) |
Total D&B Shareholders’ Equity (Deficit) | (1,092.0 | ) | | (1,048.4 | ) |
Noncontrolling Interest | 8.6 |
| | 6.1 |
|
Total Equity (Deficit) | (1,083.4 | ) | | (1,042.3 | ) |
Total Liabilities and Shareholders’ Equity (Deficit) | $ | 1,789.2 |
| | $ | 1,890.3 |
|
The accompanying notes are an integral part of the unaudited consolidated financial statements.
The Dun & Bradstreet Corporation Consolidated Statements of Cash Flows (Unaudited) |
| | | | | | | |
| Nine Months Ended |
| September 30, |
| 2014 | | 2013 |
| (Amounts in millions) |
Cash Flows from Operating Activities: | | | |
Net Income | $ | 205.3 |
| | $ | 185.5 |
|
Reconciliation of Net Income to Net Cash Provided by Operating Activities: | | | |
Depreciation and Amortization | 48.0 |
| | 53.6 |
|
Amortization of Unrecognized Pension Loss | 24.6 |
| | 25.0 |
|
Impairment of Assets | 7.3 |
| | — |
|
Income Tax Benefit from Stock-Based Awards | 3.7 |
| | 7.6 |
|
Excess Tax Benefit on Stock-Based Awards | (1.4 | ) | | (1.4 | ) |
Equity Based Compensation | 7.8 |
| | 8.0 |
|
Restructuring Charge | 11.9 |
| | 10.6 |
|
Restructuring Payments | (12.7 | ) | | (11.5 | ) |
Changes in Deferred Income Taxes, Net | (82.6 | ) | | 1.2 |
|
Changes in Accrued Income Taxes, Net | (2.8 | ) | | (1.1 | ) |
Changes in Current Assets and Liabilities: | | | |
(Increase) Decrease in Accounts Receivable | 116.6 |
| | 125.9 |
|
(Increase) Decrease in Other Current Assets | (4.8 | ) | | 18.5 |
|
Increase (Decrease) in Deferred Revenue | (71.3 | ) | | (65.9 | ) |
Increase (Decrease) in Accounts Payable | (0.4 | ) | | (6.0 | ) |
Increase (Decrease) in Accrued Liabilities | 11.2 |
| | (27.9 | ) |
Increase (Decrease) in Other Accrued and Current Liabilities | 9.1 |
| | 9.1 |
|
Changes in Non-Current Assets and Liabilities: | | | |
(Increase) Decrease in Other Long-Term Assets | 45.4 |
| | (4.1 | ) |
Net Increase (Decrease) in Long-Term Liabilities | (36.4 | ) | | (28.4 | ) |
Net, Other Non-Cash Adjustments | (1.8 | ) | | 0.6 |
|
Net Cash Provided by Operating Activities | 276.7 |
| | 299.3 |
|
Cash Flows from Investing Activities: | | | |
Payments for Acquisitions of Businesses, Net of Cash Acquired | (8.3 | ) | | — |
|
Cash Settlements of Foreign Currency Contracts | (4.0 | ) | | (6.2 | ) |
Capital Expenditures | (9.7 | ) | | (6.3 | ) |
Additions to Computer Software and Other Intangibles | (29.4 | ) | | (30.0 | ) |
Net Cash Used in Investing Activities | (51.4 | ) | | (42.5 | ) |
Cash Flows from Financing Activities: | | | |
Payments for Purchases of Treasury Shares | (225.0 | ) | | (358.1 | ) |
Net Proceeds from Stock-Based Awards | 6.4 |
| | 52.5 |
|
Payment of Bond Issuance Costs | (1.3 | ) | | — |
|
Payments of Dividends | (48.2 | ) | | (47.3 | ) |
Proceeds from Borrowings on Credit Facilities | 982.0 |
| | 461.7 |
|
Payments of Borrowings on Credit Facilities | (864.1 | ) | | (295.8 | ) |
Excess Tax Benefit on Stock-Based Awards | 1.4 |
| | 1.4 |
|
Capital Lease and Other Long-Term Financing Obligation Payment | (0.6 | ) | | (0.6 | ) |
Net, Other | — |
| | — |
|
Net Cash Used in Financing Activities | (149.4 | ) | | (186.2 | ) |
Effect of Exchange Rate Changes on Cash and Cash Equivalents | (1.8 | ) | | (5.4 | ) |
Increase (Decrease) in Cash and Cash Equivalents | 74.1 |
| | 65.2 |
|
Cash and Cash Equivalents, Beginning of Period | 235.9 |
| | 149.1 |
|
Cash and Cash Equivalents, End of Period | $ | 310.0 |
| | $ | 214.3 |
|
Supplemental Disclosure of Cash Flow Information: | | | |
Cash Paid for: | | | |
Income Taxes, Net of Refunds | $ | 80.9 |
| | $ | 79.9 |
|
Interest | $ | 22.7 |
| | $ | 20.5 |
|
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 Nine Months Ended September 30, 2014 and 2013 | | | | |
| | | | | | | | | (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, 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 | — |
| | — |
| | 183.2 |
| | — |
| | — |
| | — |
| | — |
| | 183.2 |
| | 2.3 |
| | 185.5 |
|
Equity-Based Plans | — |
| | 6.8 |
| | — |
| | 54.9 |
| | — |
| | — |
| | — |
| | 61.7 |
| | — |
| | 61.7 |
|
Treasury Shares Acquired | — |
| | — |
| | — |
| | (358.1 | ) | | — |
| | — |
| | — |
| | (358.1 | ) | | — |
| | (358.1 | ) |
Pension Adjustments, net of tax of $5.8 | — |
| | — |
| | — |
| | — |
| | — |
| | 11.0 |
| | — |
| | 11.0 |
| | — |
| | 11.0 |
|
Dividend Declared | — |
| | — |
| | (47.8 | ) | | — |
| | — |
| | — |
| | — |
| | (47.8 | ) | | — |
| | (47.8 | ) |
Change in Cumulative Translation Adjustment | — |
| | — |
| | — |
| | — |
| | (44.1 | ) | | — |
| | — |
| | (44.1 | ) | | (0.2 | ) | | (44.3 | ) |
Balance, September 30, 2013 | $ | 0.8 |
| | $ | 268.5 |
| | $ | 2,540.9 |
| | $ | (3,136.5 | ) | | $ | (195.3 | ) | | $ | (690.0 | ) | | $ | 0.1 |
| | $ | (1,211.5 | ) | | $ | 5.2 |
| | $ | (1,206.3 | ) |
| | | | | | | | | | | | | | | | | | | |
Balance, December 31, 2013 | $ | 0.8 |
| | $ | 270.0 |
| | $ | 2,600.9 |
| | $ | (3,181.3 | ) | | $ | (186.7 | ) | | $ | (552.2 | ) | | $ | 0.1 |
| | $ | (1,048.4 | ) | | $ | 6.1 |
| | $ | (1,042.3 | ) |
Net Income | — |
| | — |
| | 202.7 |
| | — |
| | — |
| | — |
| | — |
| | 202.7 |
| | 2.6 |
| | 205.3 |
|
Payment to Noncontrolling Interest | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (0.1 | ) | | (0.1 | ) |
Equity-Based Plans | — |
| | 5.8 |
| | — |
| | 12.2 |
| | — |
| | — |
| | — |
| | 18.0 |
| | — |
| | 18.0 |
|
Treasury Shares Acquired | — |
| | — |
| | — |
| | (225.0 | ) | | — |
| | — |
| | — |
| | (225.0 | ) | | — |
| | (225.0 | ) |
Pension Adjustments, net of tax of $6.9 | — |
| | — |
| | — |
| | — |
| | — |
| | 13.5 |
| | — |
| | 13.5 |
| | — |
| | 13.5 |
|
Dividend Declared | — |
| | — |
| | (48.3 | ) | | — |
| | — |
| | — |
| | — |
| | (48.3 | ) | | — |
| | (48.3 | ) |
Change in Cumulative Translation Adjustment | — |
| | — |
| | — |
| | — |
| | (4.4 | ) | | — |
| | — |
| | (4.4 | ) | | — |
| | (4.4 | ) |
Derivative Financial Instruments, net of tax of $0.1 | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (0.1 | ) | | (0.1 | ) | | — |
| | (0.1 | ) |
Balance, September 30, 2014 | $ | 0.8 |
| | $ | 275.8 |
| | $ | 2,755.3 |
| | $ | (3,394.1 | ) | | $ | (191.1 | ) | | $ | (538.7 | ) | | $ | — |
| | $ | (1,092.0 | ) | | $ | 8.6 |
| | $ | (1,083.4 | ) |
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 share and 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” or “we” or “our” or "us" or the “Company”) Annual Report on Form 10-K for the year ended December 31, 2013. 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.
The financial statements of the subsidiaries outside North America reflect results for the three month and nine month periods ended August 31 in order to facilitate the timely reporting of the 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.
| |
Note 2 -- | Recent Accounting Pronouncements |
We consider the applicability and impact of all Accounting Standards Updates ("ASU’s"). The ASU's not listed below were assessed and determined to be either not applicable or are expected to have minimal impact on our consolidated financial position and/or results of operations.
In May 2014, the Financial Accounting Standards Board ("FASB") issued ASU No. 2014-09, "Revenue from Contracts with Customers (Topic 606)," which outlines a single comprehensive model to use in accounting for revenue arising from contracts with customers and supersedes and replaces nearly all existing GAAP revenue recognition guidance, including industry-specific guidance. The authoritative guidance provides a five-step analysis of transactions to determine when and how revenue is recognized. The five steps are: (i) identify the contract with the customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations; and (v) recognize revenue when or as each performance obligation is satisfied. The authoritative guidance applies to all contracts with customers except those that are within the scope of other topics in the FASB Accounting Standards Codification. The authoritative guidance requires significantly expanded disclosures about revenue recognition and is effective for fiscal years and the interim periods within these fiscal years beginning on or after December 15, 2016. Early application is not permitted and companies have the option of using either a full retrospective or a modified approach to adopting the authoritative guidance. We are currently assessing the impact of the adoption of this authoritative guidance on our consolidated financial statements.
In April 2014, the FASB issued ASU No. 2014-08, "Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity," which changes the requirements for reporting discontinued operations by limiting it to disposals representing a strategic shift that has or will have a major effect on the entity’s operations and financial results. An entity will be required to: (i) present the assets and liabilities of a disposal group that includes a discontinued operation separately in the statement of financial position; and (ii) expand disclosures about the discontinued operations. The authoritative guidance is effective for fiscal years and the interim periods within those fiscal years beginning on or after December 15, 2014 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. 2013-11, "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 which is not available at the reporting date under the tax law of the applicable
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)-continued
(Tabular dollar amounts in millions, except share and per share data)
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. The adoption of this authoritative guidance did not have a material impact on the 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. The adoption of this authoritative guidance did not have a material impact on the consolidated financial statements.
Note 3 -- Restructuring Charge
We 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 were incurred as a result of eliminating, consolidating, standardizing and/or automating our business functions.
Restructuring charges have been recorded in accordance with ASC 712-10, “Nonretirement Postemployment Benefits,” or “ASC 712-10” and/or ASC 420-10, “Exit or Disposal Cost Obligations,” or “ASC 420-10,” as appropriate.
We record severance costs (provided under an ongoing benefit arrangement) once they are both probable and estimable in accordance with the provisions of ASC 712-10.
We account for one-time termination benefits, contract terminations and/or costs to terminate lease obligations less assumed sublease income in accordance with ASC 420-10, which addresses financial accounting and reporting for costs associated with restructuring activities. Under ASC 420-10, we establish a liability for costs 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.
Three Months Ended September 30, 2014 vs. Three Months Ended September 30, 2013
During the three months ended September 30, 2014, we recorded a $2.0 million restructuring charge. The significant components of this charge included:
| |
• | Severance and termination costs of $2.0 million in accordance with the provisions of ASC 712-10 were recorded. Approximately 25 employees were impacted. Of these 25 employees, approximately 20 employees exited the Company in the third quarter of 2014, with the remaining primarily to exit in the fourth quarter of 2014. The cash payments for these employees will be substantially completed by the fourth quarter of 2015; and |
| |
• | There were no contract terminations, lease termination obligations, or other exit costs including those to consolidate or close facilities. |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)-continued
(Tabular dollar amounts in millions, except share and per share data)
During the three months ended September 30, 2013, we recorded a $6.1 million restructuring charge. The significant components of this charge included:
| |
• | Severance and termination costs of $3.1 million in accordance with the provisions of ASC 712-10 were recorded. Approximately 65 employees were impacted. Of these 65 employees, approximately 40 employees exited the Company in the third quarter of 2013, with the remaining primarily having exited in the fourth quarter of 2013. The cash payments for these employees were substantially completed by the second quarter of 2014; and |
| |
• | Contract termination, lease termination obligations, other exit costs including those to consolidate or close facilities of $3.0 million. |
Nine Months Ended September 30, 2014 vs. Nine Months Ended September 30, 2013
During the nine months ended September 30, 2014, we recorded an $11.9 million restructuring charge. The significant components of this charge included:
| |
• | Severance and termination costs of $10.0 million in accordance with the provisions of ASC 712-10 were recorded. Approximately 125 employees were impacted. Of these 125 employees, approximately 115 employees exited the Company in the first nine months of 2014, with the remaining primarily to exit in the fourth quarter of 2014. The cash payments for these employees will be substantially completed by the fourth quarter of 2015; and |
| |
• | Contract termination, lease termination obligations, other exit costs including those to consolidate or close facilities of $1.9 million. |
During the nine months ended September 30, 2013, we recorded a $10.6 million restructuring charge. The significant components of this charge included:
| |
• | Severance and termination costs of $5.8 million in accordance with the provisions of ASC 712-10 were recorded. Approximately 130 employees were impacted. Of these 130 employees, approximately 100 employees exited the Company in the first nine months of 2013, with the remaining primarily having exited in the fourth quarter of 2013. The cash payments for these employees were substantially completed by the second quarter of 2014; and |
| |
• | Contract termination, lease termination obligations, other exit costs including those to consolidate or close facilities of $4.8 million. |
The following tables set forth, in accordance with ASC 712-10 and/or ASC 420-10, the restructuring reserves and utilization:
|
| | | | | | | | | | | |
| Severance and Termination | | Contract Termination, Lease Termination Obligations and Other Exit Costs | | Total |
Restructuring Charges: | | | | | |
Balance Remaining as of December 31, 2013 | $ | 5.8 |
| | $ | 4.6 |
| | $ | 10.4 |
|
Charge Taken during First Quarter 2014 | 4.7 |
| | 0.2 |
| | 4.9 |
|
Payments during First Quarter 2014 | (2.0 | ) | | (3.9 | ) | | (5.9 | ) |
Balance Remaining as of March 31, 2014 | $ | 8.5 |
| | $ | 0.9 |
| | $ | 9.4 |
|
Charge Taken during the Second Quarter 2014 | 3.3 |
| | 1.7 |
| | 5.0 |
|
Payments during Second Quarter 2014 | (2.8 | ) | | (0.2 | ) | | (3.0 | ) |
Balance Remaining as of June 30, 2014 | $ | 9.0 |
| | $ | 2.4 |
| | $ | 11.4 |
|
Charge Taken during the Third Quarter 2014 | $ | 2.0 |
| | $ | — |
| | 2.0 |
|
Payments during Third Quarter 2014 | (3.5 | ) | | (0.3 | ) | | (3.8 | ) |
Balance Remaining as of September 30, 2014 | $ | 7.5 |
| | $ | 2.1 |
| | $ | 9.6 |
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)-continued
(Tabular dollar amounts in millions, except share and per share data)
|
| | | | | | | | | | | |
| Severance and Termination | | Contract 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 |
|
Charge Taken during Third Quarter 2013 | $ | 3.1 |
| | $ | 3.0 |
| | 6.1 |
|
Payments during Third Quarter 2013 | $ | (2.3 | ) | | $ | (1.8 | ) | | (4.1 | ) |
Balance Remaining as of September 30, 2013 | $ | 6.2 |
| | $ | 4.1 |
| | $ | 10.3 |
|
(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:
|
| | | | | | | |
| September 30, 2014 | | December 31, 2013 |
Debt Maturing Within One Year: | | | |
Other | $ | 0.1 |
| | $ | 0.1 |
|
Total Debt Maturing Within One Year | $ | 0.1 |
| | $ | 0.1 |
|
Debt Maturing After One Year: | | | |
Long-Term Fixed-Rate Notes (Net of a $2.7 million and $3.0 million discount as of September 30, 2014 and December 31, 2013, respectively) | $ | 1,047.3 |
| | $ | 1,047.0 |
|
Fair Value Adjustment Related to Hedged Debt | 1.6 |
| | 2.5 |
|
Credit Facility | 584.4 |
| | 466.5 |
|
Total Debt Maturing After One Year | $ | 1,633.3 |
| | $ | 1,516.0 |
|
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 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 interest rates applicable to the 2017 notes and 2022 notes are subject to adjustment if our debt rating is decreased to below BBB- by either Standard & Poor's or Fitch. 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 rates and the rates cannot adjust below the initial interest rates. As of September 30, 2014, no such adjustments to the interest rates were required. The 2017 notes and 2022 notes carrying amounts of $450.0 million and $297.6 million, net of less than $0.1 million and $2.4 million of remaining issuance discounts, respectively, are recorded as “Long-Term Debt” in the unaudited consolidated balance sheet at September 30, 2014.
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
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)-continued
(Tabular dollar amounts in millions, except share and per share data)
transactions and consolidate, merge or sell assets to another entity. We were in compliance with these non-financial covenants at September 30, 2014 and 2013. The 2017 notes and 2022 notes do not contain any financial covenants.
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 2015 notes of $299.8 million, net of $0.3 million remaining discount, are recorded as “Long-Term Debt” in the unaudited consolidated balance sheet at September 30, 2014.
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. We were in compliance with these non-financial covenants at September 30, 2014 and December 31, 2013. 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 our 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 is being amortized as an offset to “Interest Expense” in our consolidated statement of operations and comprehensive income over the remaining term of the 2015 notes. Approximately $0.9 million of amortization was recorded during the nine months ended September 30, 2014, resulting in a balance of $1.6 million in the unaudited consolidated balance sheet at September 30, 2014.
Credit Facility
On July 23, 2014, we amended and extended our then-existing $800 million revolving credit facility, increasing the facility amount to $1 billion and extending the maturity to July 2019. The $1 billion revolving credit facility was amended with commercial terms substantially similar to the then-existing $800 million revolving credit facility, with the same financial covenants, and at borrowing rates that reflect the prevailing market for companies of similar credit quality. 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 September 30, 2014 and December 31, 2013.
At September 30, 2014 and December 31, 2013, we had $584.4 million and $466.5 million, respectively, of borrowings outstanding under the $1 billion and then-existing $800 million revolving credit facilities with weighted average interest rates of 1.30% and 1.24%, respectively. We borrowed under these facilities from time-to-time during the nine months ended September 30, 2014 to supplement the timing of receipts in order to fund our working capital. We have also borrowed under these facilities from time-to-time to fund a portion of our share repurchases. These facilities also supported our commercial paper program. 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 would effectively reduce the amount available for borrowing under our revolving credit facilities. We did not borrow under our commercial paper program during the nine months ended September 30, 2014 or 2013.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)-continued
(Tabular dollar amounts in millions, except share and per share data)
Other
At September 30, 2014 and December 31, 2013, certain of our international operations had uncommitted lines of credit of $1.8 million and $2.6 million, respectively. There were no borrowings outstanding under these lines of credit at September 30, 2014 and December 31, 2013, respectively. These arrangements have no material facility fees and no compensating balance requirements.
We were contingently liable under open standby letters of credit and bank guarantees issued by our banks in favor of third parties totaling $4.5 million and $4.7 million at September 30, 2014 and December 31, 2013, respectively.
Interest paid for all outstanding debt totaled $22.7 million and $20.5 million during the nine months ended September 30, 2014 and 2013, 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 either of the three month and nine month periods ended September 30, 2014 and 2013.
We are required to include in our computation of diluted EPS any contingently issuable shares that have satisfied all the necessary conditions by the end of the reporting period or that would have satisfied all necessary conditions if the end of the reporting period was the end of the performance period. Contingently issuable shares are shares that issuance is contingent upon the satisfaction of certain conditions other than just services. Beginning in 2013, we granted certain employees target awards of performance-based restricted stock units, in the form of leveraged restricted stock units or performance units. As the actual number of D&B common shares ultimately received by the employee can range from zero to 200% of the target award depending on the Company’s actual performance against the pre-established market conditions or performance conditions, these awards are considered contingently issuable shares.
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2014 | | 2013 | | 2014 | | 2013 |
Net Income Attributable to D&B | $ | 67.5 |
| | $ | 72.8 |
| | $ | 202.7 |
| | $ | 183.2 |
|
Less: Allocation to Participating Securities | — |
| | — |
| | — |
| | — |
|
Net Income Attributable to D&B Common Shareholders – Basic and Diluted | $ | 67.5 |
| | $ | 72.8 |
| | $ | 202.7 |
| | $ | 183.2 |
|
Weighted Average Number of Shares Outstanding – Basic | 36.1 |
| | 38.5 |
| | 36.7 |
| | 39.5 |
|
Dilutive Effect of Our Stock Incentive Plans | 0.4 |
| | 0.4 |
| | 0.3 |
| | 0.4 |
|
Weighted Average Number of Shares Outstanding – Diluted | 36.5 |
| | 38.9 |
| | 37.0 |
| | 39.9 |
|
Basic Earnings Per Share of Common Stock Attributable to D&B Common Shareholders | $ | 1.87 |
| | $ | 1.89 |
| | $ | 5.52 |
| | $ | 4.64 |
|
Diluted Earnings Per Share of Common Stock Attributable to D&B Common Shareholders | $ | 1.85 |
| | $ | 1.87 |
| | $ | 5.47 |
| | $ | 4.59 |
|
Stock-based awards (including contingently issuable shares) to acquire 16,137 shares and 17,940 shares of common stock were outstanding at the three month and nine month periods ended September 30, 2014, respectively, as compared to 5,414 shares and 138,504 shares of common stock that were outstanding at the three month and nine month periods ended September 30, 2013, 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 and our stock awards generally vest within three to five years.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)-continued
(Tabular dollar amounts in millions, except share and per share data)
Our share repurchases were as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the Three Months Ended September 30, | | For the Nine Months Ended September 30, |
Program | | 2014 | | 2013 | | 2014 | | 2013 |
| | Shares | | $ Amount | | Shares | | $ Amount | | Shares | | $ Amount | | Shares | | $ Amount |
| | (Dollar amounts in millions) | | (Dollar amounts in millions) |
Share Repurchase Programs (a) | | 179,386 |
| | $ | 20.0 |
| | 528,795 |
| | $ | 55.0 |
| | 1,570,326 |
| | $ | 165.0 |
| | 3,045,926 |
| | $ | 270.1 |
|
Repurchases to Mitigate the Dilutive Effect of the Shares Issued Under Our Stock Incentive Plans and Employee Stock Purchase Plan (“ESPP”) (b) | | 302,680 |
| | 35.0 |
| | 192,450 |
| | 20.0 |
| | 541,326 |
| | 60.0 |
| | 899,087 |
| | 88.0 |
|
Total Repurchases | | 482,066 |
| | $ | 55.0 |
| | 721,245 |
| | $ | 75.0 |
| | 2,111,652 |
| | $ | 225.0 |
| | 3,945,013 |
| | $ | 358.1 |
|
| |
(a) | In August 2012, our Board of Directors approved a $500 million increase to our then-existing $500 million share repurchase program, for a total program authorization of $1 billion. This program was completed in August 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 expired in October 2014. Of the 5,000,000 shares that were authorized for repurchase under this program, 2,682,492 shares were repurchased at the time this program expired in October 2014. |
In August 2014, our Board of Directors approved a new $100 million share repurchase program to mitigate the dilutive effect of shares issued under our stock incentive plans and Employee Stock Purchase Program, and to be used for discretionary share repurchases from time-to-time. Use of the new $100 million share repurchase program for anti-dilutive share repurchases was authorized to commence upon the completion or expiration of our four-year, five million share repurchase program which expired in October 2014. Any use for discretionary share repurchases was authorized to commence upon the completion of our $1 billion discretionary program which was completed in August 2014. The new $100 million share repurchase program will remain open until it has been fully utilized. As of September 30, 2014, we have not yet commenced repurchasing under this program.
Note 6 -- Other Accrued and Current Liabilities
|
| | | | | | | |
| September 30, 2014 | | December 31, 2013 |
Restructuring Accruals | $ | 9.6 |
| | $ | 10.4 |
|
Bond Interest Payable (1) | 12.5 |
| | 3.4 |
|
Professional Fees | 37.7 |
| | 34.6 |
|
Operating Expenses | 27.8 |
| | 29.1 |
|
Other Accrued Liabilities | 38.7 |
| | 38.6 |
|
| $ | 126.3 |
| | $ | 116.1 |
|
| |
(1) | The increase in Bond Interest Payable from December 31, 2013 to September 30, 2014 was primarily attributed to the timing of the semi-annual interest payments associated with our 2017 notes and 2022 notes which were issued in December 2012, and our 2015 notes which were issued in November 2010. |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)-continued
(Tabular dollar amounts in millions, except share and per share data)
Note 7 -- Contingencies
We are involved in 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 the 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 September 30, 2014. 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 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 ("SEC") and the United States Department of Justice ("DOJ") to advise both agencies of our investigation, and we are continuing to meet with representatives of both the SEC and DOJ in connection therewith. Our investigation remains ongoing and is being conducted at the direction of the Audit Committee.
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.
During the three month and nine month periods ended September 30, 2014, we incurred $1.3 million and $2.9 million of legal and other professional fees related to matters in China, respectively, as compared to $1.0 million and $6.2 million of legal and other professional fees related to matters in China, respectively, for the three month and nine month periods ended September 30, 2013, respectively.
As our investigation and our discussions with both the SEC and DOJ are ongoing, we cannot yet predict the ultimate outcome of the matter or its impact on our business, financial condition or results of operations. Based on our discussions with the SEC and DOJ, we believe that it is probable that the Company will incur a loss related to the government's investigation. We are unable at this time to reasonably estimate the amount or range of such loss, although it is possible that the amount of such loss could be material. In accordance with ASC 450, "Contingencies," or "ASC 450," no amount in respect of any potential liability in this matter, including for penalties, fines or other sanctions, has been accrued in the consolidated financial statements.
Dun & Bradstreet Credibility Corporation v. Dun & Bradstreet, Inc., and The Dun & Bradstreet Corporation, Index No. 650568/2014 (N.Y. State Supreme Court)
On February 20, 2014, Dun & Bradstreet Credibility Corporation (“DBCC”) filed an action in the Supreme Court of the State of New York for the County of New York against the Company. DBCC is an unaffiliated entity with license rights to use the Company’s brand name and to sell certain of the Company’s products. The complaint alleges that the Company breached the Commercial Services Agreement (“CSA”), entered into by the Company and DBCC on July 30, 2010 in connection with DBCC’s acquisition of the Company’s North American Self Awareness Solution business. The complaint alleges that the Company breached several of the CSA’s terms, and that the Company is trying to terminate the CSA through improper means. The Complaint alleges causes of action for breach of contract; breach of the covenant of good faith and fair dealing, in the alternative; intentional interference with prospective economic advantage; and declaratory judgment. The Complaint seeks damages and declaratory and injunctive relief. The Company was served with the Complaint on February 24, 2014. On March 10, 2014, the court entered an order staying the lawsuit to permit the parties to attempt to resolve the matter in mediation.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)-continued
(Tabular dollar amounts in millions, except share and per share data)
The Company is in the initial stages of investigating the allegations. In accordance with ASC 450, we therefore 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.
Dun & Bradstreet Credibility Corporation Class Action Litigations
O&R Construction, LLC v. Dun & Bradstreet Credibility Corporation, et al., No. 2:12 CV 02184 (TSZ) (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 alleged, 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 deceptive practices allegations. The Company filed a new motion to dismiss the amended complaint on May 3, 2013. On August 23, 2013, the Court heard the motion and granted it. Specifically, the Court dismissed a contract claim with prejudice, and dismissed all the remaining claims without prejudice. On September 23, 2013, plaintiff filed a Second Amended Complaint (“SAC”). The SAC alleges claims for negligence, defamation and unfair business practices under Washington state law against the Company for alleged inaccuracies in small business credit reports. The SAC also alleges liability against the Company under a joint venture or agency theory for practices relating to CreditBuilder. The Company filed a motion to dismiss the SAC. On January 9, 2014, the Court heard argument on the Company’s motion and dismissed with prejudice the claims based on a joint venture or agency liability theory brought against the Company. The Court denied the motion with respect to the negligence, defamation and unfair practices claims. On January 23, 2014, the Company answered the SAC. On May 2, 2014, plaintiff filed a Notice Regarding Scope of Class Definition, noting its intention to revise its class definition to exclude small businesses from the states of Ohio and California from its motion for class certification. The parties exchanged initial disclosures and completed the initial case management process in March 2013. Discovery in the case is ongoing, and the Company is continuing to investigate the allegations. In accordance with ASC 450, 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.
Die-Mension Corporation v. Dun & Bradstreet Credibility Corporation et al., No. 2:14-cv-00855 (TSZ) (W.D. Wash.) (filed as No. 1:14-cv-392 (N.D. Oh.))
On February 20, 2014, plaintiff Die-Mension Corporation (“Die-Mension”) filed a putative class action in the United States District Court for the Northern District of Ohio against the Company and DBCC, an unaffiliated entity, purporting to sue on behalf of a putative class of all purchasers of a CreditBuilder product in the United States or in such state(s) as the Court may certify. The complaint alleged that DBCC used deceptive marketing practices to sell the CreditBuilder credit monitoring products. As against the Company, the complaint alleged a violation of Ohio’s Deceptive Trade Practices Act, defamation, and negligence. The complaint alleged deceptive trade practices, negligent misrepresentation and concealment against DBCC. On March 4, 2014, in response to a direction from the Ohio court, Die-Mension withdrew its original complaint and filed an amended complaint. The amended complaint contains the same substantive allegations as the original complaint, but limits the purported class to small businesses in Ohio that purchased the CreditBuilder product. On March 13, 2014, the Company agreed to waive service of the amended complaint. On May 5, 2014, the Company and DBCC filed a Joint Motion to Transfer the litigation to the Western District of Washington. On June 9, 2014, the Ohio court issued an order granting the Defendants’ Joint Motion to Transfer. On June 22, 2014, the case was transferred to the Western District of Washington. Pursuant to an order entered on October 8, 2014 by the Washington court, the Defendants’ obligation to respond to the complaint has been stayed until the court decides whether to consolidate this case with the related cases that have been transferred to the Western District of Washington. The Company is in the initial stages of investigating the allegations. In accordance with ASC 450, we therefore 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.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)-continued
(Tabular dollar amounts in millions, except share and per share data)
Vinotemp International Corporation and CPrint®, Inc. v. Dun & Bradstreet Credibility Corporation, et al., No. 2:14-cv-01021 (TSZ) (W.D. Wash.) (filed as No. 8:14-cv-00451 (C.D. Cal.))
On March 24, 2014, plaintiffs Vinotemp International Corporation (“Vinotemp”) and CPrint®, Inc. (“CPrint”) filed a putative class action in the United States District Court for the Central District of California against the Company and DBCC, an unaffiliated entity. Vinotemp and CPrint purport to sue on behalf of all purchasers of DBCC’s CreditBuilder product in the state of California. The complaint alleges that DBCC used deceptive marketing practices to sell the CreditBuilder credit monitoring products, in violation of §17200 and §17500 of the California Business and Professions Code. The complaint also alleges negligent misrepresentation and concealment against DBCC. As against the Company, the complaint alleges that the Company entered false and inaccurate information on credit reports in violation of § 17200 of the California Business and Professions Code, and also alleges negligence and defamation claims. On March 31, 2014, the Company agreed to waive service of the complaint. On June 13, 2014, the Company and DBCC filed a Joint Unopposed Motion to Transfer the litigation to the Western District of Washington. On July 2, 2014, the California court granted the Defendants’ Joint Motion to Transfer, and on July 8, 2014, the case was transferred to the Western District of Washington. Pursuant to an order entered on October 8, 2014 by the Washington court, the Defendants’ obligation to respond to the complaint has been stayed until the court decides whether to consolidate this case with the related cases that have been transferred to the Western District of Washington. The Company is in the initial stages of investigating the allegations. In accordance with ASC 450, we therefore 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.
Flow Sciences Inc. v. Dun & Bradstreet Credibility Corporation, et al., No. 2:14-cv-01404 (TSZ) (W.D. Wash.) (filed as No. 7:14-cv-128 (E.D.N.C.))
On June 13, 2014, plaintiff Flow Sciences Inc. (“Flow Sciences”) filed a putative class action in the United States District Court for the Eastern District of North Carolina against the Company and Dun & Bradstreet Credibility Corporation (“DBCC”), an unaffiliated entity. Flow Sciences purports to sue on behalf of all purchasers of DBCC’s CreditBuilder product in the state of North Carolina. The complaint alleges that the Company and DBCC engaged in deceptive practices in connection with DBCC’s sale of the CreditBuilder credit monitoring products, in violation of North Carolina’s Unfair Trade Practices Act, N.C. Gen. Stat. § 75-1.1 et seq. In addition, as against the Company, the complaint alleges negligence and defamation claims. The complaint also alleges negligent misrepresentation and concealment against DBCC. On June 26, 2014, the Company agreed to waive service of the complaint. On August 4, 2014, the Company and DBCC filed a Joint Unopposed Motion to Transfer the litigation to the Western District of Washington. On September 8, 2014, the North Carolina court granted the motion to transfer, and on September 9, 2014, the case was transferred to the Western District of Washington. Pursuant to an order entered on October 8, 2014 by the Washington court, the Defendants’ obligation to respond to the complaint has been stayed until the court decides whether to consolidate this case with the related cases that have been transferred to the Western District of Washington. The Company is in the initial stages of investigating the allegations. In accordance with ASC 450 Contingencies, we therefore 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.
Altaflo, LLC v. Dun & Bradstreet Credibility Corporation, et al., No. 2:14-cv-01288 (TSZ) (W.D. Wash.) (filed as No. 2:14-cv-03961 (D.N.J.))
On June 20, 2014, plaintiff Altaflo, LLC (“Altaflo”) filed a putative class action in the United States District Court for the District of New Jersey against the Company and Dun & Bradstreet Credibility Corporation (“DBCC”), an unaffiliated entity. Altaflo purports to sue on behalf of all purchasers of DBCC’s CreditBuilder product in the state of New Jersey. The complaint alleges that the Company and DBCC engaged in deceptive practices in connection with DBCC’s sale of the CreditBuilder credit monitoring products, in violation of the New Jersey Consumer Fraud Act, N.J. Stat. § 56:8-1 et seq. In addition, as against the Company, the complaint alleges negligence and defamation claims. The complaint also alleges negligent misrepresentation and concealment against DBCC. On June 26, 2014, the Company agreed to waive service of the complaint. On July 29, 2014, the Company and DBCC filed a Joint Unopposed Motion to Transfer the litigation to the Western District of Washington. On July 31, 2014, the New Jersey court granted the Defendants’ Joint Motion to Transfer, and the case was transferred to the Western District of Washington on August 20, 2014. Pursuant to an order entered on October 8, 2014 by the Washington court, the Defendants’ obligation to respond to the complaint has been stayed until the court decides whether to consolidate this case with the related cases that have been transferred to the Western District of Washington. The Company is in the initial stages of investigating the allegations. In accordance with ASC 450 Contingencies, we therefore do
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)-continued
(Tabular dollar amounts in millions, except share and per share data)
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.
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 September 30, 2014, our effective tax rate was 14.4% as compared to 33.8% for the three months ended September 30, 2013. The effective tax rate for the three months ended September 30, 2014 was positively impacted by the release of reserves of $17.2 million for uncertain tax positions due to the expiration of a statute of limitations for the 2010 tax year. For the three months ended September 30, 2014, 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 nine months ended September 30, 2014, our effective tax rate was (0.4)% as compared to 32.3% for the nine months ended September 30, 2013. The effective tax rate for the nine months ended September 30, 2014, was impacted by the release of reserves of $75.9 million, net of cash paid, for uncertain tax positions due to the effective settlement of audits for the 2007 - 2009 tax years and the expiration of the statute of limitations for the 2010 tax year in the third quarter of 2014. The effective tax rate for the nine months ended September 30, 2013 was 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 nine months ended September 30, 2014, 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 September 30, 2014 was $26.9 million. The amount of unrecognized tax benefits that, if recognized, would impact the effective tax rate is $25.2 million, net of related additional tax benefits. During the three months ended September 30, 2014, we decreased our unrecognized tax benefits by $17.7 million, net of increases. The decrease is primarily due to the expiration of applicable statutes of limitation and settlements with taxing authorities. During the nine months ended September 30, 2014, we decreased our unrecognized tax benefits by approximately $78.9 million, net of increases. The decrease is primarily due to settlements with taxing authorities and the expiration of applicable statutes of limitation. We anticipate that it is reasonably possible that total unrecognized tax benefits will decrease by approximately $19 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 IRS for years prior to 2011. In state and local jurisdictions, with a few exceptions, we are no longer subject to examinations by tax authorities for years prior to 2009. In foreign jurisdictions, with a few exceptions, we are no longer subject to examinations by tax authorities for years prior to 2008.
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 nine month periods ended September 30, 2014 was $0.2 million and $1.0 million, net of tax benefits, respectively, as compared to $0.6 million and $1.8 million, net of tax benefits, for the three month and nine month periods ended September 30, 2013, respectively. The total amount of accrued interest as of September 30, 2014 was $3.3 million, net of tax benefits, as compared to $9.7 million, net of tax benefits, as of September 30, 2013.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)-continued
(Tabular dollar amounts in millions, except share and per share data)
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 September 30, | | For the Nine Months Ended September 30, | | For the Three Months Ended September 30, | | For the Nine Months Ended September 30, |
| 2014 | | 2013 | | 2014 | | 2013 | | 2014 | | 2013 | | 2014 | | 2013 |
Components of Net Periodic Cost (Income): | | | | | | | | | | | | | | | |
Service Cost | $ | 0.8 |
| | $ | 0.9 |
| | $ | 2.9 |
| | $ | 3.5 |
| | $ | 0.2 |
| | $ | 0.2 |
| | $ | 0.6 |
| | $ | 0.6 |
|
Interest Cost | 20.6 |
| | 17.5 |
| | 60.1 |
| | 52.4 |
| | 0.3 |
| | 0.3 |
| | 0.7 |
| | 0.6 |
|
Expected Return on Plan Assets | (26.1 | ) | | (23.4 | ) | | (76.5 | ) | | (70.3 | ) | | — |
| | — |
| | — |
| | — |
|
Amortization of Prior Service Cost (Credit) | — |
| | 0.1 |
| | 0.2 |
| | 0.3 |
| | (1.2 | ) | | (2.3 | ) | | (2.0 | ) | | (6.9 | ) |
Recognized Actuarial Loss (Gain) | 9.5 |
| | 11.0 |
| | 27.3 |
| | 32.7 |
| | (0.4 | ) | | (0.3 | ) | | (0.9 | ) | | (1.1 | ) |
Net Periodic Cost (Income) | $ | 4.8 |
| | $ | 6.1 |
| | $ | 14.0 |
| | $ | 18.6 |
| | $ | (1.1 | ) | | $ | (2.1 | ) | | $ | (1.6 | ) | | $ | (6.8 | ) |
We previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2013 that we expected to contribute approximately $20 million to our U.S. Non-Qualified plans and non-U.S. pension plans and that we expected to make benefit payments of approximately $4 million to our postretirement benefit plan for the year ended December 31, 2014. As of September 30, 2014, we have made contributions to our U.S. Non-Qualified and non-U.S. pension plans of $14.5 million and to our postretirement benefit plan of $2.7 million.
In July 2014, we amended our post-65 retiree health plan to change the health plan options. Effective January 1, 2015, we will provide our retirees and dependents age 65 or older access to coverage in the individual Medicare market. We will also contribute towards retirees’ premiums and other out-of pocket medical costs. As part of this change, we will no longer offer group-based retiree medical and prescription drug coverage as of December 31, 2014. As a result of this change, we reduced our accumulated postretirement obligation by $4.9 million in the third quarter of 2014, which will be amortized over approximately three years.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)-continued
(Tabular dollar amounts in millions, except share and per share data)
Note 10 -- Segment Information
The operating 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 and report our business through the following three segments:
| |
• | North America (which consists of our operations in the United States ("U.S.") and Canada); |
| |
• | Asia Pacific (which primarily consists of our operations in Australia, Greater China, India and Asia Pacific Worldwide Network); and |
| |
• | Europe and Other International Markets (which primarily consists of operations in the United Kingdom ("U.K."), 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 September 30, | | For the Nine Months Ended September 30, |
| 2014 | | 2013 | | 2014 | | 2013 |
Revenue: | | | | | | | |
North America | $ | 305.3 |
| | $ | 305.8 |
| | $ | 868.9 |
| | $ | 867.7 |
|
Asia Pacific | 47.2 |
| | 44.3 |
| | 135.3 |
| | 134.1 |
|
Europe and Other International Markets | 64.6 |
| | 60.7 |
| | 187.7 |
| | 175.2 |
|
Consolidated Core | 417.1 |
| | 410.8 |
| | 1,191.9 |
| | 1,177.0 |
|
Divested and Other Businesses | — |
| | 0.3 |
| | 0.1 |
| | 1.5 |
|
Consolidated Total | $ | 417.1 |
| | $ | 411.1 |
| | $ | 1,192.0 |
| | $ | 1,178.5 |
|
Operating Income (Loss): | | | | | | | |
North America | $ | 88.2 |
| | $ | 112.3 |
| | $ | 246.1 |
| | $ | 282.8 |
|
Asia Pacific | 7.7 |
| | 5.1 |
| | 21.6 |
| | 15.9 |
|
Europe and Other International Markets | 19.4 |
| | 19.7 |
| | 54.3 |
| | 49.4 |
|
Total Segments | 115.3 |
| | 137.1 |
| | 322.0 |
| | 348.1 |
|
Corporate and Other (1) | (18.5 | ) | | (16.6 | ) | | (57.9 | ) | | (45.9 | ) |
Consolidated Total | 96.8 |
| | 120.5 |
| | 264.1 |
| | 302.2 |
|
Non-Operating Income (Expense), Net (2) | (18.0 | ) | | (10.2 | ) | | (62.1 | ) | | (30.8 | ) |
Income Before Provision for Income Taxes and Equity in Net Income of Affiliates | $ | 78.8 |
| | $ | 110.3 |
| | $ | 202.0 |
| | $ | 271.4 |
|
| |
(1) | The following table summarizes “Corporate and Other:” |
|
| | | | | | | | | | | | | | | |
| For the Three Months Ended September 30, | | For the Nine Months Ended September 30, |
| 2014 | | 2013 | | 2014 | | 2013 |
Corporate Costs | $ | (15.3 | ) | | $ | (9.6 | ) | | $ | (43.3 | ) | | $ | (29.1 | ) |
Restructuring Expense | (2.0 | ) | | (6.1 | ) | | (11.9 | ) | | (10.6 | ) |
Legal and Other Professional Fees and Shut-Down Costs Related to Matters in China | (1.2 | ) | | (0.9 | ) | | (2.7 | ) | | (6.2 | ) |
Total Corporate and Other | $ | (18.5 | ) | | $ | (16.6 | ) | | $ | (57.9 | ) | | $ | (45.9 | ) |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)-continued
(Tabular dollar amounts in millions, except share and per share data)
| |
(2) | The following table summarizes “Non-Operating Income (Expense):” |
|
| | | | | | | | | | | | | | | |
| For the Three Months Ended September 30, | | For the Nine Months Ended September 30, |
| 2014 | | 2013 | | 2014 | | 2013 |
Interest Income | $ | 0.4 |
| | $ | 0.3 |
| | $ | 1.2 |
| | $ | 0.9 |
|
Interest Expense | (10.9 | ) | | (10.3 | ) | | (32.3 | ) | | (30.2 | ) |
Other Income (Expense) - Net (a) | (7.5 | ) | | (0.2 | ) | | (31.0 | ) | | (1.5 | ) |
Non-Operating Income (Expense) - Net | $ | (18.0 | ) | | $ | (10.2 | ) | | $ | (62.1 | ) | | $ | (30.8 | ) |
(a) The increase in Other Expense for the three months ended September 30, 2014, was primarily due to the reduction of a contractual receipt under the Tax Allocation Agreement between Moody’s Corporation and D&B as it relates to the expiration of a statute of limitations for the 2010 tax year. The increase in Other Expense for the nine months ended September 30, 2014, was primarily due to the reduction of a contractual receipt under the Tax Allocation Agreement between Moody’s Corporation and D&B as it relates to the effective settlement of audits for the 2007 - 2009 tax years and the expiration of a statute of limitations for the 2010 tax year.
Supplemental Geographic and Customer Solution Set Information:
|
| | | | | | | | | | | | | | | |
| For the Three Months Ended September 30, | | For the Nine Months Ended September 30, |
| 2014 | | 2013 | | 2014 | | 2013 |
Customer Solution Set Revenue: | | | | | | | |
North America: | | | | | | | |
Risk Management Solutions | $ | 177.4 |
| | $ | 176.7 |
| | $ | 504.7 |
| | $ | 510.8 |
|
Sales & Marketing Solutions | 127.9 |
| | 129.1 |
| | 364.2 |
| | 356.9 |
|
North America Core Revenue | 305.3 |
| | 305.8 |
| | 868.9 |
| | 867.7 |
|
Divested and Other Businesses | — |
| | — |
| | — |
| | — |
|
Total North America Revenue | 305.3 |
| | 305.8 |
| | 868.9 |
| | 867.7 |
|
| | | | | | | |
Asia Pacific: | | | | | | | |
Risk Management Solutions | 41.8 |
| | 38.2 |
| | 119.1 |
| | 116.4 |
|
Sales & Marketing Solutions | 5.4 |
| | 6.1 |
| | 16.2 |
| | 17.7 |
|
Asia Pacific Core Revenue | 47.2 |
| | 44.3 |
| | 135.3 |
| | 134.1 |
|
Divested and Other Businesses (3) | — |
| | 0.1 |
| | — |
| | 1.0 |
|
Total Asia Pacific Revenue | 47.2 |
| | 44.4 |
| | 135.3 |
| | 135.1 |
|
| | | | | | | |
Europe and Other International Markets: | | | | | | | |
Risk Management Solutions | 51.3 |
| | 48.4 |
| | 152.3 |
| | 143.0 |
|
Sales & Marketing Solutions | 13.3 |
| | 12.3 |
| | 35.4 |
| | 32.2 |
|
Europe and Other International Markets Core Revenue | 64.6 |
| | 60.7 |
| | 187.7 |
| | 175.2 |
|
Divested and Other Businesses (3) | — |
| | 0.2 |
| | 0.1 |
| | 0.5 |
|
Total Europe and Other International Markets Revenue | 64.6 |
| | 60.9 |
| | 187.8 |
| | 175.7 |
|
| | | | | | | |
Consolidated Total: | | | | | | | |
Risk Management Solutions | 270.5 |
| | 263.3 |
| | 776.1 |
| | 770.2 |
|
Sales & Marketing Solutions | 146.6 |
| | 147.5 |
| | 415.8 |
| | 406.8 |
|
Core Revenue | 417.1 |
| | 410.8 |
| | 1,191.9 |
| | 1,177.0 |
|
Divested and Other Businesses (3) | — |
| | 0.3 |
| | 0.1 |
| | 1.5 |
|
Consolidated Total Revenue | $ | 417.1 |
| | $ | 411.1 |
| | $ | 1,192.0 |
| | $ | 1,178.5 |
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)-continued
(Tabular dollar amounts in millions, except share and per share data)
| |
(3) | During the fourth quarter of 2013, we ceased the operations of our India Event Planning and Rural Marketing Businesses in our Asia Pacific segment. These businesses contributed less than 1% to our Asia Pacific total revenue for each of the three month and nine month periods ended September 30, 2013. During the first quarter of 2014, we ceased the operations of our Ireland Small Corporate Registry Business in our Europe and Other International Markets segment. This business contributed less than 1% to our Europe and Other International Markets total revenue for each of the three month and nine month periods ended September 30, 2013, as well as the nine months ended September 30, 2014. These businesses have been classified as “Divested and Other Businesses.” |
The following table represents Divested and Other Businesses revenue by solution set:
|
| | | | | | | | | | | | | | | |
| For the Three Months Ended September 30, | | For the Nine Months Ended September 30, |
| 2014 | | 2013 | | 2014 | | 2013 |
Divested and Other Businesses: | | | | | | | |
Risk Management Solutions | $ | — |
| | $ | 0.2 |
| | $ | 0.1 |
| | $ | 0.5 |
|
Sales & Marketing Solutions | — |
| | 0.1 |
| | — |
| | 1.0 |
|
Total Divested and Other Businesses Revenue | $ | — |
| | $ | 0.3 |
| | $ | 0.1 |
| | $ | 1.5 |
|
|
| | | | | | | |
| At September 30, 2014 | | At December 31, 2013 |
Assets: | | | |
North America (4) | $ | 725.6 |
| | $ | 843.2 |
|
Asia Pacific (5) | 377.4 |
| | 371.9 |
|
Europe and Other International Markets (6) | 485.5 |
| | 445.4 |
|
Total Segments | 1,588.5 |
| | 1,660.5 |
|
Corporate and Other (7) | 200.7 |
| | 229.8 |
|
Consolidated Total | $ | 1,789.2 |
| | $ | 1,890.3 |
|
Goodwill: | | | |
North America | $ | 269.9 |
| | $ | 265.1 |
|
Asia Pacific | 211.9 |
| | 210.2 |
|
Europe and Other International Markets | 112.8 |
| | 113.8 |
|
Consolidated Total (8) | $ | 594.6 |
| | $ | 589.1 |
|
| |
(4) | The decrease in assets in the North America segment to $725.6 million at September 30, 2014 from $843.2 million at December 31, 2013 was primarily due to a decrease in accounts receivable compared to the fourth quarter of 2013 resulting from the cyclical sales pattern of our North America business. |
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(5) | The increase in assets in the Asia Pacific segment to $377.4 million at September 30, 2014 from $371.9 million at December 31, 2013 was primarily due to the positive impact of foreign currency translation. |
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(6) | The increase in assets in the Europe and Other International Markets segment to $485.5 million at September 30, 2014 from $445.4 million at December 31, 2013 was primarily due to an increase in cash as a result of operational performance in the region. |
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(7) | The decrease in assets in Corporate and Other to $200.7 million at September 30, 2014 from $229.8 million at December 31, 2013 was primarily due to the reduction of a contractual receipt under the Tax Allocation Agreement between Moody’s Corporation and D&B as it relates to the effective settlement of audits for the 2007 - 2009 tax years and the expiration of a statute of limitations for the 2010 tax year. |
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(8) | The increase in total goodwill to $594.6 million at September 30, 2014 from $589.1 million at December 31, 2013 was primarily driven by small acquisitions. |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)-continued
(Tabular dollar amounts in millions, except share and per share data)
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 and certain third-party and intercompany transactions. We may also use foreign exchange forward contracts to hedge our net investments in our foreign subsidiaries. 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 September 30, 2014 and December 31, 2013, 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 September 30, 2014 and December 31, 2013, because we sell to a large number of customers in different geographical locations and industries.
Interest Rate Risk Management
Our objective in managing our exposure to interest rates is to limit the impact of interest rate changes on our earnings, cash flows and financial position, and to lower our 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. As of September 30, 2014, we did not have any interest rate derivatives outstanding.
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 the unaudited consolidated statements 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 the unaudited consolidated statements of operations and comprehensive income.
In March 2012, in connection with our objective to manage our 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 is being amortized as an offset to “Interest Expense” in our consolidated statement of operations and comprehensive income over the remaining term of the 2015 notes. Approximately $0.9 million of amortization was recorded during the nine months ended September 30, 2014, resulting in a balance of $1.6 million in the unaudited consolidated balance sheet at September 30, 2014.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)-continued
(Tabular dollar amounts in millions, except share and per share data)
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 ("OCI") 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 international 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 the unaudited consolidated statements 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 forward contracts to hedge certain net investment positions. The underlying transactions and the corresponding foreign exchange forward contracts are marked-to-market at the end of each quarter and the fair value impacts are reflected within the unaudited consolidated financial statements.
As of September 30, 2014 and 2013, the notional amounts of our foreign exchange contracts were $299.4 million and $286.6 million, respectively.
Fair Values of Derivative Instruments in the Consolidated Balance Sheet
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| | | | | | | | | | | | | | | | | | | | | | | |
| Asset Derivatives | | Liability Derivatives |
| September 30, 2014 | | December 31, 2013 | | September 30, 2014 | | December 31, 2013 |
| 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 | | $ | 0.4 |
| | Other Current Assets | | $ | 0.4 |
| | Other Accrued & Current Liabilities | | $ | 0.3 |
| | Other Accrued & Current Liabilities | | $ | 0.4 |
|
Total derivatives not designated as hedging instruments | | | $ | 0.4 |
| | | | $ | 0.4 |
| | | | $ | 0.3 |
| | | | $ | 0.4 |
|
Total Derivatives | | | $ | 0.4 |
| | | | $ | 0.4 |
| | | | $ | 0.3 |
| | | | $ | 0.4 |
|
Our foreign exchange forward contracts are not designated as hedging instruments under authoritative guidance.
The Effect of Derivative Instruments on the Consolidated Statement of Operations and Comprehensive Income
|
| | | | | | | | | | | | | | | | | |
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 September 30, | | For the Nine Months Ended September 30, |
| | | 2014 | | 2013 | | 2014 | | 2013 |
Foreign exchange forward contracts | Non-Operating Income (Expenses) – Net | | $ | (3.1 | ) | | $ | (0.2 | ) | | $ | (4.0 | ) | | $ | (5.4 | ) |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)-continued
(Tabular dollar amounts in millions, except share and per share data)
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. Fair value for derivative financial instruments is determined utilizing a market approach.
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 September 30, 2014 and December 31, 2013, 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:
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| |
Level Input: | Input Definition: |
Level I | Observable inputs utilizing quoted prices (unadjusted) for identical assets or liabilities in active markets at the measurement date. |
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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. |
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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. |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)-continued
(Tabular dollar amounts in millions, except share and per share data)
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 September 30, 2014 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 September 30, 2014 |
Assets: | | | | | | | |
Cash Equivalents (1) | $ | 130.0 |
| | $ | — |
| | $ | — |
| | $ | 130.0 |
|
Other Current Assets: | | | | | | | |
Foreign Exchange Forwards (2) | $ | — |
| | $ | 0.4 |
| | $ | — |
| | $ | 0.4 |
|
Liabilities: | | | | | | | |
Other Accrued and Current Liabilities: | | | | | | | |
Foreign Exchange Forwards (2) | $ | — |
| | $ | 0.3 |
| | $ | — |
| | $ | 0.3 |
|
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(1) | Cash equivalents represent fair value as it consists of highly liquid investments with an original maturity of three months or less. |
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(2) | Primarily represents foreign currency forward contracts. Fair value is determined utilizing a market approach and considers a factor for nonperformance in the valuation. |
The following table summarizes fair value measurements by level at December 31, 2013 for assets and liabilities measured at fair value on a recurring basis: