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Equifax Reports Solid, Broad-Based Results With Record Revenue in Second Quarter of 2006
ATLANTA, July 20 /PRNewswire-FirstCall/ -- Equifax Inc. (NYSE: EFX) today reported second quarter of 2006 earnings with record revenue. In the quarter ended June 30, revenue was $387.7 million, a 7 percent increase from the second quarter of 2005. Net income was $69.6 million, an 11 percent increase from the same quarter in 2005. Diluted earnings per share totaled $0.53, a 13 percent increase from the second quarter of 2005. On a non-GAAP basis, excluding the impact of certain litigation matters in the second quarter of 2006 and the incremental impact of adopting Statement of Financial Accounting Standards No. 123(R), "Share-Based Payment" ("SFAS 123R"), net income was $66.5 million, a 6 percent increase from the second quarter of 2005, and diluted earnings per share totaled $0.51, an 8 percent increase from the second quarter of 2005. "Once again, North America, Europe and Latin America provided great momentum in a very challenging environment. I am also pleased with the growth of our commercial business in the U.S.," said Richard F. Smith, Equifax Chairman and Chief Executive Officer. "Our European operations improved significantly, while Personal Solutions made meaningful progress on its long- term targets for growth and profitability." Second Quarter 2006 Highlights
- Operating margin was 25 percent in the second quarter of 2006 compared
to 29 percent in the second quarter of 2005. On a non-GAAP basis,
excluding the impact of certain litigation matters, operating margin
was 28 percent in the second quarter of 2006.
- Cash provided by operating activities for the second quarter of 2006
was $90.7 million.
- Equifax repurchased 1.4 million shares of its common stock on the open
market for $52.0 million.
- In June 2006, Equifax consummated a settlement of claims against
certain former selling shareholders of Naviant, Inc., an acquisition in
2002, which resulted in a $14.1 million non-taxable gain recorded in
other income, net and $0.11 impact on diluted earnings per share.
- Equifax recognized a loss contingency in operating expenses associated
with certain litigation matters related to Personal Solutions, which
resulted in an $8.7 million loss, net of tax, and $0.07 impact on
diluted earnings per share.
- The negative incremental impact during the second quarter of 2006 due
to our adoption on January 1, 2006 of SFAS 123R was $2.3 million, net
of tax, of additional stock-based compensation expense and $0.02 on
diluted earnings per share.
North America
Total revenue was $311.6 million in the second quarter, a 5 percent increase from the second quarter of 2005. Operating margin for North America was 33 percent in the second quarter of 2006 compared to 38 percent in the second quarter of 2005. On a non-GAAP basis, excluding the impact of certain litigation matters, operating margin was 37 percent in the second quarter of 2006. - North America Information Services revenue was $211.1 million, up
3 percent compared to the second quarter of 2005.
- Marketing Services revenue was $69.3 million, up 10 percent compared to
the second quarter of 2005.
- Personal Solutions revenue was $31.2 million, up 7 percent compared to
the second quarter of 2005.
Europe
Total revenue was $37.6 million, up 7 percent compared to the second quarter of 2005. In local currency, revenue was up 9 percent when compared to the same period in the prior year. Operating margin was 25 percent, up from 22 percent in the second quarter of 2005. Latin America Total revenue rose to $38.5 million, up 26 percent compared to the second quarter of 2005. In local currency, revenue was up 17 percent when compared to the same period in the prior year. Operating margin was 29 percent, up from 26 percent in the second quarter of 2005. About Equifax Equifax Inc. is a global leader in information technology that enables and secures global commerce with consumers and businesses. We are one of the largest sources of consumer and commercial data. Utilizing our databases, advanced analytics and proprietary enabling technology, we provide real-time answers for our customers. This innovative ability to transform information into intelligence is valued by customers across a wide range of industries and markets. Headquartered in Atlanta, Georgia, Equifax employs approximately 4,700 people in 13 countries throughout North America, Latin America and Europe. Equifax was founded 107 years ago, and today is a member of Standard & Poor's (S&P) 500(R) Index. Our common stock is traded on the New York Stock Exchange under the symbol EFX. http://www.equifax.com/ Earnings Conference Call and Webcast Equifax's quarterly teleconference to discuss the second quarter earnings release will be held today at 9:00 a.m. (EDT). The live audio Webcast of the speakers' presentations will be available at http://www.equifax.com/ and a replay will be available at the same site shortly after the conclusion of the Webcast. This press release, the financial tables, as well as other supplemental information, are also available at that Web site. Supplemental Financial Information and Non-GAAP Financial Measures The Common Questions and Answers (Unaudited) ("Q&A") that are a part of this press release include supplemental financial information which Equifax believes is useful to assess its operating performance. The following financial measures included herein or in the Q&A are not prepared in accordance with U.S. generally accepted accounting principles ("GAAP"): free cash flow; net income and diluted earnings per share, excluding certain litigation matters and incremental impact of SFAS 123R; and operating income (loss) and operating margin, excluding the litigation loss contingency for certain business segments. A reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measures is presented in the Q&A. This information can also be found under "Our Company/Investor Center/Non-GAAP/GAAP Financial Measures" on our Web site at http://www.equifax.com/. Non-GAAP financial measures should not be considered a substitute for, or superior to, measures of financial performance prepared in accordance with GAAP. Caution Concerning Forward-Looking Statements Statements in this press release that relate to Equifax's future plans, objectives, expectations, performance, events and the like may constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Future events, risks and uncertainties, individually or in the aggregate, could cause our actual results to differ materially from those expressed or implied in these forward-looking statements. Those factors include, but are not limited to, changes in worldwide and U.S. economic conditions that materially impact consumer spending and consumer debt, changes in demand for Equifax's products and services, our ability to develop new products and services, pricing and other competitive pressures, risks relating to illegal third party efforts to access data, risks associated with the integration of acquisitions and other investments, changes in laws and regulations governing our business, including federal or state responses to identity theft concerns, the outcome of pending litigation and certain other factors discussed under the caption "Risk Factors" in the Management's Discussion and Analysis section of Equifax's Annual Report on Form 10-K for the year ended December 31, 2005, and in our other filings with the Securities and Exchange Commission. Equifax assumes no obligation to update any forward-looking statements to reflect events that occur or circumstances that exist after the date on which they were made. EQUIFAX INC.
CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended
June 30,
2006 2005
(In millions, except (Unaudited)
per share amounts)
Operating revenue $387.7 $363.4
Operating expenses:
Cost of services (exclusive of
depreciation and amortization
below) 161.8 147.8
Selling, general and
administrative expenses 109.0 88.8
Depreciation and amortization 20.5 20.1
Total operating expenses 291.3 256.7
Operating income 96.4 106.7
Interest expense (8.2) (9.8)
Minority interests in earnings,
net of tax (1.1) (1.3)
Other income, net 15.0 2.4
Income before income taxes 102.1 98.0
Provision for income taxes (32.5) (35.4)
Net income $69.6 $62.6
Basic earnings per common share $0.54 $0.48
Shares used in computing basic
earnings per share 128.1 129.8
Diluted earnings per common share $0.53 $0.47
Shares used in computing diluted
earnings per share 130.4 132.7
Dividends per common share $0.04 $0.04
EQUIFAX INC.
CONSOLIDATED STATEMENTS OF INCOME
Six Months Ended
June 30,
2006 2005
(In millions, except (Unaudited)
per share amounts)
Operating revenue $761.7 $706.8
Operating expenses:
Cost of services (exclusive of
depreciation and amortization
below) 311.7 290.3
Selling, general and
administrative expenses 202.8 167.8
Depreciation and amortization 41.6 40.0
Total operating expenses 556.1 498.1
Operating income 205.6 208.7
Interest expense (16.1) (18.9)
Minority interests in earnings,
net of tax (2.0) (2.6)
Other income, net 15.5 5.1
Income before income taxes 203.0 192.3
Provision for income taxes (70.5) (71.1)
Net income $132.5 $121.2
Basic earnings per common share $1.03 $0.93
Shares used in computing basic
earnings per share 128.6 129.8
Diluted earnings per common share $1.01 $0.91
Shares used in computing diluted
earnings per share 131.0 132.6
Dividends per common share $0.08 $0.07
EQUIFAX INC.
CONSOLIDATED BALANCE SHEETS
June 30, December 31,
2006 2005
(In millions, except par values) (Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $48.2 $37.5
Trade accounts receivable, net
of allowance for doubtful
accounts of $10.6 at June 30,
2006 and $9.6 at December 31, 2005 239.0 216.0
Prepaid expenses 24.9 17.9
Other current assets 10.4 9.0
Total current assets 322.5 280.4
Property and equipment:
Capitalized internal-use
software and system costs 225.3 205.9
Data processing equipment and
furniture 131.4 124.5
Land, buildings and improvements 29.2 29.1
Total property and equipment 385.9 359.5
Less accumulated depreciation (227.6) (202.7)
Total property and equipment,
net 158.3 156.8
Goodwill 804.8 791.2
Indefinite-lived intangible assets 95.3 95.0
Purchased intangible assets, net 250.2 263.4
Prepaid pension asset 191.5 183.7
Other assets, net 61.1 61.0
Total assets $1,883.7 $1,831.5
LIABILITIES AND SHAREHOLDERS'
EQUITY
Current liabilities:
Short-term debt and current
maturities $95.6 $92.3
Accounts payable 16.8 5.9
Accrued expenses 51.4 54.0
Accrued salaries and bonuses 26.1 40.7
Deferred revenue 63.9 49.2
Accrued legal expenses 20.0 6.1
Other current liabilities 38.8 46.3
Total current liabilities 312.6 294.5
Long-term debt 433.8 463.8
Deferred income tax liabilities,
net 129.8 126.1
Other long-term liabilities 114.8 126.8
Total liabilities 991.0 1,011.2
Shareholders' equity:
Preferred stock, $0.01 par
value: Authorized shares -
10.0; Issued shares - none - -
Common stock, $1.25 par value:
Authorized shares - 300.0;
Issued shares - 185.9 at
June 30, 2006 and 185.2 at
December 31, 2005;
Outstanding shares - 127.3 at
June 30, 2006 and 129.2 at
December 31, 2005 232.4 231.5
Paid-in capital 587.5 559.0
Retained earnings 1,647.0 1,525.1
Accumulated other comprehensive
loss (138.3) (157.8)
Treasury stock, at cost, 54.4
shares at June 30, 2006 and
51.7 shares at December 31,
2005 (1,374.2) (1,274.6)
Stock held by employee benefits
trusts, at cost, 4.2 shares at
June 30, 2006 and 4.3 shares
at December 31, 2005 (61.7) (62.9)
Total shareholders' equity 892.7 820.3
Total liabilities and
shareholders' equity $1,883.7 $1,831.5
EQUIFAX INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended
June 30,
2006 2005
(In millions) (Unaudited)
Operating activities:
Net income $132.5 $121.2
Adjustments to reconcile net income
to net cash provided
by operating activities:
Depreciation and amortization 41.6 40.0
Stock-based compensation expense 10.8 3.8
Tax effects of stock-based
compensation plans 4.2 7.4
Excess tax benefits from stock-
based compensation plans (2.9) -
Deferred income taxes 0.3 13.3
Changes in assets and
liabilities, excluding effects
of acquisitions:
Accounts receivable, net (20.5) (16.8)
Prepaid expenses and other
current assets (6.6) 0.2
Other assets (4.7) (13.6)
Current liabilities, excluding
debt 14.3 (15.2)
Other long-term liabilities,
excluding debt (13.0) (8.0)
Cash provided by operating activities 156.0 132.3
Investing activities:
Capital expenditures (26.5) (22.1)
Acquisitions, net of cash acquired - (104.5)
Other (0.1) 10.1
Cash used in investing activities (26.6) (116.5)
Financing activities:
Net short-term borrowings 3.3 11.4
Net repayments under long-term
revolving credit facilities (30.0) -
Treasury stock purchases (98.6) (55.0)
Dividends paid (10.3) (9.4)
Proceeds from exercise of stock
options 13.4 31.0
Excess tax benefits from stock-
based compensation plans 2.9 -
Other 0.1 0.5
Cash used in financing activities (119.2) (21.5)
Effect of foreign currency exchange
rates on cash and cash equivalents 0.5 (1.7)
Increase (decrease) in cash and cash
equivalents 10.7 (7.4)
Cash and cash equivalents, beginning
of period 37.5 52.1
Cash and cash equivalents, end of
period $48.2 $44.7
Common Questions & Answers (Unaudited)
(Dollars in millions)
1. Can you provide a further analysis of operating revenue and
operating income?
Operating revenue and operating income consist of the following
components:
Three Months Ended June 30,
% of % of $ %
Operating revenue: 2006 Revenue 2005 Revenue Change Change
North America
Information Services $211.1 54% $205.8 57% $5.3 3%
Marketing Services 69.3 18% 62.8 17% 6.5 10%
Personal Solutions 31.2 8% 29.3 8% 1.9 7%
North America - Total 311.6 80% 297.9 82% 13.7 5%
Europe 37.6 10% 35.0 10% 2.6 7%
Latin America 38.5 10% 30.5 8% 8.0 26%
Total operating revenue $387.7 100% $363.4 100% $24.3 7%
Three Months Ended June 30,
Profit Profit $ %
Operating income: 2006 Margin 2005 Margin Change Change
North America
Information Services $88.4 42% $88.1 43% $0.3 0%
Marketing Services 24.4 35% 19.9 32% 4.5 22%
Personal Solutions (11.3) -36% 4.3 15% (15.6) -361%
North America - Total 101.5 33% 112.3 38% (10.8) -10%
Europe 9.5 25% 7.7 22% 1.8 24%
Latin America 11.0 29% 8.1 26% 2.9 36%
General Corporate Expense (25.6) nm (21.4) nm (4.2) -20%
Total operating income $96.4 25% $106.7 29% $(10.3) -10%
Six Months Ended June 30,
% of % of $ %
Operating revenue: 2006 Revenue 2005 Revenue Change Change
North America
Information Services $419.0 55% $398.3 56% $20.7 5%
Marketing Services 134.9 17% 121.6 17% 13.3 11%
Personal Solutions 61.8 8% 59.1 9% 2.7 5%
North America - Total 615.7 80% 579.0 82% 36.7 6%
Europe 72.5 10% 71.7 10% 0.8 1%
Latin America 73.5 10% 56.1 8% 17.4 31%
Total operating revenue $761.7 100% $706.8 100% $54.9 8%
Six Months Ended June 30,
Profit Profit $ %
Operating income: 2006 Margin 2005 Margin Change Change
North America
Information Services $177.5 42% $172.4 43% $5.1 3%
Marketing Services 44.9 33% 38.2 31% 6.7 18%
Personal Solutions (10.4) -17% 7.3 12% (17.7) -243%
North America - Total 212.0 34% 217.9 38% (5.9) -3%
Europe 18.3 25% 15.7 22% 2.6 17%
Latin America 20.4 28% 14.4 26% 6.0 42%
General Corporate Expense (45.1) nm (39.3) nm (5.8) -15%
Total operating income $205.6 27% $208.7 29% $(3.1) -2%
nm - not meaningful
2. Can you provide a further analysis of operating revenue in the North
America segment?
North America operating revenue consists of the following components:
Three Months Ended June 30,
North America operating % of % of $ %
revenue: 2006 Revenue 2005 Revenue Change Change
U.S. Consumer and Commercial
Services $162.0 52% $156.2 53% $5.8 4%
Mortgage Services 19.3 6% 21.8 7% (2.5) -12%
Canadian Operations 29.8 10% 27.8 9% 2.0 7%
Total Information Services 211.1 68% 205.8 69% 5.3 3%
Credit Marketing Services 40.7 13% 38.4 13% 2.3 6%
Direct Marketing Services 28.6 9% 24.4 8% 4.2 17%
Total Marketing Services 69.3 22% 62.8 21% 6.5 10%
Personal Solutions 31.2 10% 29.3 10% 1.9 7%
Total North America
operating revenue $311.6 100% $297.9 100% $13.7 5%
Six Months Ended June 30,
North America operating % of % of $ %
revenue: 2006 Revenue 2005 Revenue Change Change
U.S. Consumer and Commercial
Services $321.5 52% $300.6 52% $20.9 7%
Mortgage Services 39.4 6% 43.2 8% (3.8) -9%
Canadian Operations 58.1 10% 54.5 9% 3.6 7%
Total Information Services 419.0 68% 398.3 69% 20.7 5%
Credit Marketing Services 80.4 13% 73.0 13% 7.4 10%
Direct Marketing Services 54.5 9% 48.6 8% 5.9 12%
Total Marketing Services 134.9 22% 121.6 21% 13.3 11%
Personal Solutions 61.8 10% 59.1 10% 2.7 5%
Total North America
operating revenue $615.7 100% $579.0 100% $36.7 6%
3. Can you provide an analysis of the components of operating expenses
as a percentage of operating revenue?
Components of operating expenses as a percentage of operating
revenue are as follows:
Three Months Ended Six Months Ended
June 30, June 30,
2006 2005 2006 2005
Cost of services 42% 41% 41% 41%
Selling, general and
administrative expenses 28% 24% 27% 24%
Depreciation and amortization 5% 6% 5% 6%
Total operating expenses 75% 71% 73% 71%
4. Can you provide depreciation and amortization by segment?
Depreciation and amortization are as follows:
Three Months Ended Six Months Ended
June 30, June 30,
2006 2005 2006 2005
North America $14.5 $14.4 $29.5 $28.5
Europe 1.4 1.4 2.8 3.0
Latin America 1.9 1.7 3.7 3.4
General Corporate 2.7 2.6 5.6 5.1
Total depreciation and
amortization $20.5 $20.1 $41.6 $40.0
5. What was the currency impact on the foreign operations?
The U.S. dollar impact on operating revenue and operating income is as
follows:
Three Months Ended June 30, 2006
Operating Revenue Operating Income
Amount % Amount %
Canada $3.0 10% $1.1 9%
Europe (0.5) -2% (0.1) -1%
Latin America 2.9 9% 0.7 8%
$5.4 1% $1.7 2%
Six Months Ended June 30, 2006
Operating Revenue Operating Income
Amount % Amount %
Canada $4.6 8% $1.7 8%
Europe (3.3) -5% (0.8) -5%
Latin America 6.7 12% 1.5 10%
$8.0 1% $2.4 1%
6. What was the level of debt?
Total debt was comprised of the following components:
June 30, December 31,
2006 2005
Senior notes and debentures -
long-term $400.0 $400.0
Borrowings under long-term
revolving credit facilities 35.0 65.0
Short-term trade receivables-
backed revolving credit facility 90.0 88.0
Other 5.6 4.4
Total debt 530.6 557.4
Less short-term debt and current
maturities (95.6) (92.3)
Less unamortized discounts (1.2) (1.3)
Total long-term debt $433.8 $463.8
7. What is the current authorization amount for stock buybacks?
As of June 30, 2006, $248.4 million remained authorized for future
share repurchases. We invested $97.0 million and $55.0 million in
open market purchases of our common stock during the six months ended
June 30, 2006 and 2005.
8. What drove the fluctuation in the effective tax rate?
Our effective income tax rate was 34.7% for the six months ended June
30, 2006 down from 37.0% for the same period in 2005. The reduction
was due primarily to the non-taxable litigation settlement during the
second quarter of 2006 and lower state income taxes, partially offset
by additional tax expense related to non-deductible executive
compensation and a higher foreign tax rate. The effective income tax
rate was 31.8% for the three months ended June 30, 2006, down from
36.1% for the same period in 2005, due to the same factors discussed
above.
9. What was the impact of the retirement of Karen H. Gaston, the
Company's former Chief Administrative Officer, as disclosed in the
Form 8-K filed on May 15, 2006, on the financial results for the three
and six months ended June 30, 2006?
Ms. Gaston's retirement on June 1, 2006 resulted in incremental
expenses of $1.3 million, pretax, and $0.8 million, net of tax,
during the three and six months ended June 30, 2006.
Reconciliations of Non-GAAP Financial Measures to the Comparable GAAP
Financial Measures (Unaudited)
(Dollars in millions, except per share amounts)
A. Reconciliation of cash provided by operating activities to free cash
flow:
Three Months Ended Six Months Ended
June 30, June 30,
2006 2005 2006 2005
Cash provided by operating
activities $90.7 $90.5 $156.0 $132.3
Less capital expenditures (15.8) (12.3) (26.5) (22.1)
Free cash flow $74.9 $78.2 $129.5 $110.2
B. Reconciliation of net income to net income, excluding certain
litigation matters and incremental impact of SFAS 123R:
Three Months Ended Six Months Ended
June 30, June 30,
% %
2006 2005 Change 2006 2005 Change
Net income $69.6 $62.6 11% $132.5 $121.2 9%
Certain litigation
matters (5.4) - (5.4) -
Net income, excluding
certain litigation
matters 64.2 62.6 127.1 121.2
Incremental impact
of SFAS 123R 2.3 - 3.9 -
Net income, excluding
certain litigation
matters and incremental
impact of SFAS 123R $66.5 $62.6 6% $131.0 $121.2 8%
C. Reconciliation of diluted earnings per share to diluted earnings per
share, excluding certain litigation matters and incremental impact of
SFAS 123R:
Three Months Ended Six Months Ended
June 30, June 30,
% %
2006 2005 Change 2006 2005 Change
Diluted earnings per
share $0.53 $0.47 13% $1.01 $0.91 11%
Certain litigation
matters (0.04) - (0.04) -
Diluted earnings per
share, excluding
certain litigation
matters 0.49 0.47 0.97 0.91
Incremental impact
of SFAS 123R 0.02 - 0.03 -
Diluted earnings per
share, excluding
certain litigation
matters and incremental
impact of SFAS 123R $0.51 $0.47 8% $1.00 $0.91 9%
D. Reconciliation of Personal Solutions operating loss to operating
income, excluding the litigation loss contingency, and operating
margin to operating margin, excluding the litigation loss contingency:
Three Months Ended Six Months Ended
June 30, June 30,
% %
2006 2005 Change 2006 2005 Change
Personal Solutions
operating income (loss) $(11.3) $4.3 -361% $(10.4) $7.3 -243%
Litigation loss
contingency 14.0 - 14.0 -
Personal Solutions
operating income,
excluding the
litigation loss
contingency $2.7 $4.3 -37% $3.6 $7.3 -51%
Three Months Ended Six Months Ended
June 30, June 30,
2006 2005 2006 2005
Personal Solutions
operating margin -36% 15% -17% 12%
Litigation loss
contingency 45% - 23% -
Personal Solutions
operating margin,
excluding the
litigation loss
contingency 9% 15% 6% 12%
E. Reconciliation of Consolidated operating income to operating income,
excluding the litigation loss contingency, and operating margin to
operating margin, excluding the litigation loss contingency:
Three Months Ended Six Months Ended
June 30, June 30,
% %
2006 2005 Change 2006 2005 Change
Consolidated operating
income $96.4 $106.7 -10% $205.6 $208.7 -2%
Litigation loss
contingency 14.0 - 14.0 -
Consolidated operating
income, excluding the
litigation loss
contingency $110.4 $106.7 4% $219.6 $208.7 5%
Three Months Ended Six Months Ended
June 30, June 30,
2006 2005 2006 2005
Consolidated operating
margin 25% 29% 27% 29%
Litigation loss
contingency 3% - 2% -
Consolidated operating
margin, excluding the
litigation loss
contingency 28% 29% 29% 29%
F. Reconciliation of North America operating income to operating income,
excluding the litigation loss contingency, and operating margin to
operating margin, excluding the litigation loss contingency:
Three Months Ended Six Months Ended
June 30, June 30,
% %
2006 2005 Change 2006 2005 Change
North America operating
income $101.5 $112.3 -10% $212.0 $217.9 -3%
Litigation loss
contingency 14.0 - 14.0 -
North America operating
income, excluding the
litigation loss
contingency $115.5 $112.3 3% $226.0 $217.9 4%
Three Months Ended Six Months Ended
June 30, June 30,
2006 2005 2006 2005
North America operating
margin 33% 38% 34% 38%
Litigation loss
contingency 4% - 3% -
North America operating
margin, excluding the
litigation loss
contingency 37% 38% 37% 38%
Notes to Reconciliations of Non-GAAP Financial Measures to the Comparable GAAP Financial Measures Free Cash Flow - The free cash flow financial measure is not prepared in conformity with U.S. generally accepted accounting principles ("GAAP") and excludes capital expenditures from cash provided by operating activities. Free cash flow is not a measurement of liquidity under GAAP and should not be considered as an alternative to net income, operating income, cash flow from operating activities, or the change in cash and cash equivalents on the Consolidated Balance Sheets and may not be comparable with free cash flow as defined by other companies. Management believes free cash flow financial information provides meaningful supplemental information regarding our performance and liquidity by excluding capital expenditures in order to show the cash generated by us that is available to be used for dividends and discretionary investment. Equifax believes that this financial information is useful to our management and investors in assessing Equifax's historical performance and liquidity and when planning, forecasting and analyzing future periods. Net Income and Diluted Earnings per Share, Excluding Certain Litigation Matters and Incremental Impact of SFAS 123R; Personal Solutions Operating Loss and Operating Margin, Excluding the Litigation Loss Contingency; Consolidated Operating Income and Operating Margin, Excluding the Litigation Loss Contingency; and North America Operating Income and Operating Margin, Excluding the Litigation Loss Contingency - Certain Litigation Matters - In June 2006, we consummated a settlement of claims against certain former selling shareholders of Naviant, Inc. In 2004, we served a demand for arbitration alleging, among other things, that the sellers were liable for rescission or for indemnification as a result of breaches of various representations and warranties concerning information furnished to us in connection with our acquisition of Naviant, Inc. in 2002. As a result of this settlement, we recognized a $14.1 million non-taxable gain in other income, net on our Consolidated Statements of Income for the three and six months ended June 30, 2006. During the second quarter of 2006, we also recorded a $14.0 million, pretax, and $8.7 million, net of tax, loss contingency related to certain legal matters. Of this $14.0 million, pretax loss, $11.5 million was recognized in selling, general and administrative expenses and $2.5 million was recognized in cost of services on our Consolidated Statements of Income during the three and six months ended June 30, 2006. This loss is included within our Personal Solutions segment financial results. Management believes excluding these litigation matters from certain financial results provides meaningful supplemental information regarding our financial results for the three and six months ended June 30, 2006, as compared to the same periods in 2005 since (1) the gain related to the litigation settlement associated with our previous acquisition of Naviant Inc. is material and is not reflective of our core operations, and (2) the litigation loss contingency of such a material amount is not comparable to similar activity in the prior periods presented. This is consistent with how our management reviews and assesses Equifax's historical performance and is useful when planning, forecasting and analyzing future periods. SFAS 123R - On January 1, 2006, we adopted Statement of Financial Accounting Standards No. 123(R), "Share-Based Payment" ("SFAS 123R"), which requires the cost relating to share-based payment transactions in which an entity exchanges its equity instruments for goods or services from either employees or non-employees be recognized in the Consolidated Financial Statements as the goods or services are rendered. The cost is measured at the fair value of the equity instrument issued. Since the date of adoption of SFAS 123R, we are no longer permitted to follow the intrinsic value accounting method under previous accounting guidance, which resulted in no stock-based compensation expense for stock options for which the exercise price was equal to the fair value of the underlying stock on the date of grant. Management believes excluding the incremental impact of SFAS 123R from net income and diluted earnings per share provides meaningful supplemental information regarding our financial results for the three and six months ended June 30, 2006, as compared to the same periods in 2005 since our Consolidated Financial Statements issued prior to January 1, 2006 did not change as a result of adopting SFAS 123R. There was no change to our prior years' Consolidated Financial Statements because we elected the modified prospective transition method. Equifax believes that this financial information is useful to investors since it is consistent with how management assesses Equifax's historical performance and year-over-year growth and when planning, forecasting and analyzing future periods. By excluding the incremental impact of SFAS 123R, our management is able to review the financial statement impact of various business initiatives and evaluate the effectiveness of such initiatives. The incremental impact of SFAS 123R during the three and six months ended June 30, 2006 represents (1) the stock option expense related to stock options unvested at the time of adoption and granted during 2006, (2) the accelerated expense recognition for nonvested shares that were issued during 2006 to employees that are retirement-eligible prior to the expiration of the stated vesting period, and (3) the impact of estimating forfeitures related to nonvested shares. For additional information about SFAS 123R, see Note 2 of the Notes to Consolidated Financial Statements in our Form 10-Q for the three months ended March 31, 2006. These non-GAAP financial measures are not a measurement of financial performance under GAAP and should not be considered as an alternative to net income, operating income, operating margin or earnings per share and may not be comparable with non-GAAP financial measures used by other companies. Website: http://www.equifax.com/ |
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