UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549


FORM 10-Q

(Mark One)

x                              QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2007

OR

o                                 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: 001-06605


EQUIFAX INC.

(Exact name of registrant as specified in its charter)

Georgia

 

58-0401110

(State or other jurisdiction of
incorporation or organization)

 

(I.R.S. Employer
Identification No.)

1550 Peachtree Street, N.W.,
Atlanta, Georgia

 

30309

(Address of principal executive offices)

 

(Zip Code)

404-885-8000

(Registrant’s telephone number, including area code)

 

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. x Yes   o No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (check one)

Large accelerated filer x

 

Accelerated filer o

 

Non-accelerated filer o

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). o Yes   x No

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Class

 

Outstanding at July 27, 2007

Common Stock, $1.25 Par Value

 

140,824,139

 

 




EQUIFAX INC.
QUARTERLY REPORT ON FORM 10-Q
QUARTER ENDED JUNE 30, 2007
INDEX

 

 

 

 

Page

 

PART I

 

Financial Information (Unaudited)

 

 

Item 1.

 

Consolidated Financial Statements

 

 

 

 

Consolidated Statements of Income—Three Months Ended June 30, 2007 and 2006

 

3

 

 

 

Consolidated Statements of Income—Six Months Ended June 30, 2007 and 2006

 

4

 

 

 

Consolidated Balance Sheets—June 30, 2007 and December 31, 2006

 

5

 

 

 

Consolidated Statements of Cash Flows—Six Months Ended June 30, 2007
and 2006

 

6

 

 

 

Consolidated Statements of Shareholders’ Equity and Other Comprehensive
Income—Six Months Ended June 30, 2007

 

7

 

 

 

Notes to Consolidated Financial Statements

 

8

 

Item 2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

23

 

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

 

43

 

Item 4.

 

Controls and Procedures

 

43

 

PART II

 

Other Information

 

44

 

Item 1.

 

Legal Proceedings

 

44

 

Item 1A.

 

Risk Factors

 

45

 

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

46

 

Item 4.

 

Submission of Matters to a Vote of Security Holders

 

47

 

Item 5.

 

Other Information

 

48

 

Item 6.

 

Exhibits

 

48

 

Signatures

 

50

 

Index to Exhibits

 

51

 

 

2




PART I. FINANCIAL INFORMATION

ITEM 1.                CONSOLIDATED FINANCIAL STATEMENTS

EQUIFAX INC.

CONSOLIDATED STATEMENTS OF INCOME

 

 

Three Months Ended

 

 

 

June 30,

 

(In millions, except per share amounts)

 

    2007    

 

    2006    

 

 

 

(Unaudited)

 

Operating revenue

 

 

$

454.5

 

 

 

$

387.7

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

Cost of services (exclusive of depreciation and amortization below)

 

 

189.9

 

 

 

161.8

 

 

Selling, general and administrative expenses

 

 

115.2

 

 

 

109.0

 

 

Depreciation and amortization

 

 

29.6

 

 

 

20.5

 

 

Total operating expenses

 

 

334.7

 

 

 

291.3

 

 

Operating income

 

 

119.8

 

 

 

96.4

 

 

Interest expense

 

 

(10.4

)

 

 

(8.2

)

 

Minority interests in earnings, net of tax

 

 

(1.3

)

 

 

(1.1

)

 

Other income, net

 

 

1.1

 

 

 

15.0

 

 

Income before income taxes

 

 

109.2

 

 

 

102.1

 

 

Provision for income taxes

 

 

(39.1

)

 

 

(32.5

)

 

Net income

 

 

$

70.1

 

 

 

$

69.6

 

 

Basic earnings per common share

 

 

$

0.52

 

 

 

$

0.54

 

 

Weighted-average shares used in computing basic earnings per share

 

 

134.9

 

 

 

128.1

 

 

Diluted earnings per common share

 

 

$

0.51

 

 

 

$

0.53

 

 

Weighted-average shares used in computing diluted earnings per share

 

 

138.6

 

 

 

130.4

 

 

Dividends per common share

 

 

$

0.04

 

 

 

$

0.04

 

 

 

See Notes to Consolidated Financial Statements.

3




EQUIFAX INC.
CONSOLIDATED STATEMENTS OF INCOME

 

 

Six Months Ended

 

 

 

June 30,

 

(In millions, except per share amounts)

 

2007

 

2006

 

 

 

(Unaudited)

 

Operating revenue

 

 

$

859.7

 

 

$

761.7

 

Operating expenses:

 

 

 

 

 

 

 

Cost of services (exclusive of depreciation and amortization below)

 

 

359.2

 

 

313.0

 

Selling, general and administrative expenses

 

 

212.8

 

 

201.5

 

Depreciation and amortization

 

 

51.0

 

 

41.6

 

Total operating expenses

 

 

623.0

 

 

556.1

 

Operating income

 

 

236.7

 

 

205.6

 

Interest expense

 

 

(17.8

)

 

(16.1

)

Minority interests in earnings, net of tax

 

 

(2.7

)

 

(2.0

)

Other income, net

 

 

1.3

 

 

15.5

 

Income before income taxes

 

 

217.5

 

 

203.0

 

Provision for income taxes

 

 

(78.4

)

 

(70.5

)

Net income

 

 

$

139.1

 

 

$

132.5

 

Basic earnings per common share

 

 

$

1.07

 

 

$

1.03

 

Weighted-average shares used in computing basic earnings per share

 

 

129.9

 

 

128.6

 

Diluted earnings per common share

 

 

$

1.05

 

 

$

1.01

 

Weighted-average shares used in computing diluted earnings per share

 

 

132.9

 

 

131.0

 

Dividends per common share

 

 

$

0.08

 

 

$

0.08

 

 

See Notes to Consolidated Financial Statements.

4




EQUIFAX INC.
CONSOLIDATED BALANCE SHEETS

(In millions, except par values)

 

June 30,
2007

 

December 31,
2006

 

 

 

(Unaudited)

 

 

 

ASSETS

 

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

 

$

264.2

 

 

 

$

67.8

 

 

Trade accounts receivable, net of allowance for doubtful accounts of $8.5 and $8.7 at June 30, 2007 and December 31, 2006, respectively

 

 

296.2

 

 

 

244.8

 

 

Prepaid expenses

 

 

35.5

 

 

 

21.5

 

 

Other current assets

 

 

29.9

 

 

 

11.1

 

 

Total current assets

 

 

625.8

 

 

 

345.2

 

 

Property and equipment:

 

 

 

 

 

 

 

 

 

Capitalized internal-use software and system costs

 

 

263.9

 

 

 

243.8

 

 

Data processing equipment and furniture

 

 

159.3

 

 

 

132.2

 

 

Land, buildings and improvements

 

 

37.5

 

 

 

29.7

 

 

Total property and equipment

 

 

460.7

 

 

 

405.7

 

 

Less accumulated depreciation and amortization

 

 

(273.0

)

 

 

(243.8

)

 

Total property and equipment, net

 

 

187.7

 

 

 

161.9

 

 

Goodwill

 

 

1,778.5

 

 

 

842.0

 

 

Indefinite-lived intangible assets

 

 

95.5

 

 

 

95.2

 

 

Purchased intangible assets, net

 

 

801.0

 

 

 

242.2

 

 

Prepaid pension asset

 

 

57.8

 

 

 

47.7

 

 

Other assets, net

 

 

67.4

 

 

 

56.4

 

 

Total assets

 

 

$

3,613.7

 

 

 

$

1,790.6

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

 

Short-term debt and current maturities

 

 

$

427.2

 

 

 

$

330.0

 

 

Accounts payable

 

 

33.9

 

 

 

23.5

 

 

Accrued expenses

 

 

69.2

 

 

 

62.0

 

 

Accrued salaries and bonuses

 

 

34.4

 

 

 

41.9

 

 

Deferred revenue

 

 

72.4

 

 

 

62.7

 

 

Other current liabilities

 

 

79.5

 

 

 

62.0

 

 

Total current liabilities

 

 

716.6

 

 

 

582.1

 

 

Long-term debt

 

 

778.6

 

 

 

173.9

 

 

Deferred income tax liabilities, net

 

 

267.1

 

 

 

70.8

 

 

Long-term pension and other postretirement benefit liabilities

 

 

60.7

 

 

 

65.3

 

 

Other long-term liabilities

 

 

63.5

 

 

 

60.4

 

 

Total liabilities

 

 

1,886.5

 

 

 

952.5

 

 

Commitments and Contingencies (see Note 5)

 

 

 

 

 

 

 

 

 

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—187.7 and 186.3 at June 30, 2007 and December 31, 2006, respectively;
Outstanding shares—142.7 and 124.7 at June 30, 2007 and December 31, 2006, respectively

 

 

234.7

 

 

 

232.9

 

 

Paid-in capital

 

 

985.8

 

 

 

609.2

 

 

Retained earnings

 

 

1,907.4

 

 

 

1,778.6

 

 

Accumulated other comprehensive loss

 

 

(204.2

)

 

 

(232.2

)

 

Treasury stock, at cost, 41.3 shares and 57.7 shares at June 30, 2007 and December 31, 2006

 

 

(1,138.9

)

 

 

(1,490.9

)

 

Stock held by employee benefits trusts, at cost, 3.7 shares and 3.9 shares at June 30, 2007 and December 31, 2006

 

 

(57.6

)

 

 

(59.5

)

 

Total shareholders’ equity

 

 

1,727.2

 

 

 

838.1

 

 

Total liabilities and shareholders’ equity

 

 

$

3,613.7

 

 

 

$

1,790.6

 

 

 

See Notes to Consolidated Financial Statements.

5




EQUIFAX INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS

 

 

Six Months Ended

 

 

 

June 30,

 

(In millions)

 

2007

 

2006

 

 

 

(Unaudited)

 

Operating activities:

 

 

 

 

 

Net income

 

$

139.1

 

$

132.5

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

Depreciation and amortization

 

51.0

 

41.6

 

Stock-based compensation expense

 

9.0

 

10.8

 

Tax effects of stock-based compensation plans

 

10.8

 

4.2

 

Excess tax benefits from stock-based compensation plans

 

(10.5

)

(4.1

)

Deferred income taxes

 

(1.1

)

0.3

 

Changes in assets and liabilities, excluding effects of acquisitions:

 

 

 

 

 

Accounts receivable, net

 

0.5

 

(20.5

)

Prepaid expenses and other current assets

 

(17.9

)

(6.6

)

Other assets

 

(14.4

)

(4.7

)

Current liabilities, excluding debt

 

(15.4

)

14.3

 

Other long-term liabilities, excluding debt

 

2.0

 

(13.0

)

Cash provided by operating activities

 

153.1

 

154.8

 

Investing activities:

 

 

 

 

 

Capital expenditures

 

(31.8

)

(26.5

)

Acquisitions, net of cash acquired

 

(290.7

)

 

Other

 

(3.8

)

(0.1

)

Cash used in investing activities

 

(326.3

)

(26.6

)

Financing activities:

 

 

 

 

 

Net short-term borrowings

 

97.1

 

3.3

 

Net repayments under long-term revolving credit facilities

 

(121.6

)

(30.0

)

Treasury stock purchases

 

(170.3

)

(98.6

)

Dividends paid

 

(10.0

)

(10.3

)

Proceeds from exercise of stock options

 

22.4

 

13.4

 

Excess tax benefits from stock-based compensation plans

 

10.5

 

4.1

 

Proceeds from issuance of long-term debt

 

544.6

 

 

Payments on cash flow hedges

 

(4.9

)

 

Other

 

(0.1

)

0.1

 

Cash provided by (used in) financing activities

 

367.7

 

(118.0

)

Effect of foreign currency exchange rates on cash and cash equivalents

 

1.9

 

0.5

 

Increase in cash and cash equivalents

 

196.4

 

10.7

 

Cash and cash equivalents, beginning of period

 

67.8

 

37.5

 

Cash and cash equivalents, end of period

 

$

264.2

 

$

48.2

 

 

See Notes to Consolidated Financial Statements.

6




EQUIFAX INC.

CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY

AND COMPREHENSIVE INCOME

(UNAUDITED)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

Held By

 

 

 

 

 

Common Stock

 

 

 

 

 

Other

 

 

 

Employee

 

Total

 

 

 

Shares

 

 

 

Paid-In

 

Retained

 

Comprehensive

 

Treasury

 

Benefits

 

Shareholders’

 

 

 

Outstanding

 

Amount

 

Capital

 

Earnings

 

Loss

 

Stock

 

Trusts

 

Equity

 

 

 

(In millions, except per share amounts)

 

Balance, December 31, 2006

 

 

124.7

 

 

 

$

232.9

 

 

 

$

609.2

 

 

 

$

1,778.6

 

 

 

$

(232.2

)

 

$

(1,490.9

)

 

$

(59.5

)

 

 

$

838.1

 

 

Net income

 

 

 

 

 

 

 

 

 

 

 

139.1

 

 

 

 

 

 

 

 

 

 

139.1

 

 

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

28.0

 

 

 

 

 

 

 

28.0

 

 

Shares issued under stock plans

 

 

1.2

 

 

 

1.6

 

 

 

18.5

 

 

 

 

 

 

 

 

 

 

 

 

 

20.1

 

 

Shares issued under benefits plans

 

 

0.2

 

 

 

 

 

 

1.8

 

 

 

 

 

 

 

 

 

 

1.6

 

 

 

3.4

 

 

Treasury stock exchanged for option price

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(0.5

)

 

 

 

 

(0.5

)

 

Treasury stock exchanged for minimum tax withholdings

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1.1

)

 

 

 

 

(1.1

)

 

Treasury stock issued for TALX acquisition

 

 

20.6

 

 

 

 

 

 

330.7

 

 

 

 

 

 

 

 

532.9

 

 

 

 

 

863.6

 

 

Treasury stock purchased ($42.91 per share)*

 

 

(4.2

)

 

 

 

 

 

 

 

 

 

 

 

 

 

(179.3

)

 

 

 

 

(179.3

)

 

Cash dividends ($0.04 per share)

 

 

 

 

 

 

 

 

 

 

 

(10.3

)

 

 

 

 

 

 

 

 

 

(10.3

)

 

Reclassification of director deferred compensation plan from liabilities to shareholders’ equity based on plan
amendments

 

 

 

 

 

 

 

 

5.5

 

 

 

 

 

 

 

 

 

 

 

 

 

5.5

 

 

Stock-based compensation expense

 

 

 

 

 

 

 

 

9.0

 

 

 

 

 

 

 

 

 

 

 

 

 

9.0

 

 

Tax effects of stock-based compensation plans

 

 

 

 

 

 

 

 

10.8

 

 

 

 

 

 

 

 

 

 

 

 

 

10.8

 

 

Dividends paid to employee benefits trusts

 

 

 

 

 

 

 

 

0.3

 

 

 

 

 

 

 

 

 

 

 

 

 

0.3

 

 

Other

 

 

0.2

 

 

 

0.2

 

 

 

 

 

 

 

 

 

 

 

 

 

0.3

 

 

 

0.5

 

 

Balance, June 30, 2007

 

 

142.7

 

 

 

$

234.7

 

 

 

$

985.8

 

 

 

$

1,907.4

 

 

 

$

(204.2

)

 

$

(1,138.9

)

 

$

(57.6

)

 

 

$

1,727.2

 

 


*                      At June 30, 2007, approximately $603.3 million was authorized for future repurchases of our common stock.

Accumulated Other Comprehensive Loss consists of the following components:

 

 

June 30,

 

December 31,

 

 

 

2007

 

2006

 

 

 

(In millions)

 

Foreign currency translation

 

 

$

(85.5

)

 

 

$

(113.2

)

 

Unrecognized actuarial losses and prior service cost related to our pension and other postretirement benefit plans, net of accumulated tax of $66.5 at June 30, 2007

 

 

(115.1

)

 

 

 

 

Minimum pension liability, net of accumulated tax of $4.5 at December 31, 2006

 

 

 

 

 

(7.7

)

 

Adjustment to initially apply SFAS 158, net of accumulated tax of $63.8 at December 31, 2006

 

 

 

 

 

(110.7

)

 

Cash flow hedging transactions, net of accumulated tax of $2.1 and $0.4 at June 30, 2007 and December 31, 2006, respectively

 

 

(3.6

)

 

 

(0.6

)

 

Accumulated other comprehensive loss

 

 

$

(204.2

)

 

 

$

(232.2

)

 

 

Comprehensive Income is as follows:

 

 

Three Months
Ended
June 30,

 

Six Months
Ended
June 30,

 

 

 

2007

 

2006

 

2007

 

2006

 

 

 

(In millions)

 

Net income

 

$

70.1

 

$

69.6

 

$

139.1

 

$

132.5

 

Other comprehensive income:

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustment

 

21.6

 

10.5

 

27.7

 

18.9

 

Recognition of prior service cost and actuarial losses related to our pension and other postretirement benefit plans

 

1.5

 

 

3.3

 

 

Change in cumulative loss from cash flow hedging transactions

 

(3.0

)

0.2

 

(3.0

)

0.6

 

Comprehensive income

 

$

90.2

 

$

80.3

 

$

167.1

 

$

152.0

 

 

See Notes to Consolidated Financial Statements.

7




EQUIFAX INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
June 30, 2007

As used herein, the terms “Equifax”, “the Company”, “we”, “our” and “us” refer to Equifax Inc., a Georgia corporation, and its consolidated subsidiaries as a combined entity, except where it is clear that the terms mean only Equifax Inc.

1.                 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of Operations.   We collect, organize and manage various types of financial, demographic, employment and marketing information. Our products and services enable businesses to make credit and service decisions, manage their portfolio risk, automate or outsource certain payroll, tax and human resources business processes, and develop marketing strategies concerning consumers and commercial enterprises. We serve customers across a wide range of industries, including the financial services, mortgage, retail, telecommunications, utilities, automotive, brokerage, healthcare and insurance industries, as well as government agencies. We also enable consumers to manage and protect their financial health through a portfolio of products offered directly to consumers. As of June 30, 2007, we operated in 14 countries: Argentina, Brazil, Canada, Chile, Costa Rica, El Salvador, Honduras, Peru, Portugal, the Republic of Ireland, Spain, the United Kingdom (“U.K.”), Uruguay, and the United States of America (“U.S.”)

We develop, maintain and enhance secured proprietary information databases through the compilation of accounts receivable and employment information about consumers and businesses that we obtain from a variety of sources, such as credit granting institutions, public record information (including bankruptcies, liens and judgments), income and tax information primarily from large to mid-sized companies in the U.S., and marketing information from surveys and warranty cards. We process this information utilizing our proprietary information management systems.

Basis of Presentation.   The accompanying unaudited Consolidated Financial Statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) and for interim financial information, the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, this Form 10-Q does not include all of the information required by GAAP for complete financial statements. As a result, these Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements and the notes thereto included in our annual report on Form 10-K for the fiscal year ended December 31, 2006 (“2006 Form 10-K”).

Our unaudited Consolidated Financial Statements reflect all adjustments which are, in the opinion of management, necessary for a fair presentation of the periods presented therein. All adjustments made have been of a normal recurring nature.

We have reclassified certain prior period amounts in our Consolidated Financial Statements to conform to the current period presentation. The effect of these reclassifications is not material.

8




Earnings Per Share.   In accordance with Statement of Financial Accounting Standards (“SFAS”) No. 128, “Earnings per Share,” our basic earnings per share (“EPS”) is calculated as net income divided by the weighted-average number of common shares outstanding during the period. Diluted EPS is calculated to reflect the potential dilution that would occur if stock options or other contracts to issue common stock were exercised and resulted in additional common shares outstanding. The income amount used in our EPS calculations is the same for both basic and diluted EPS. A reconciliation of the weighted-average outstanding shares used in the two calculations is as follows:

 

 

Three Months
Ended
June 30,

 

Six Months
Ended
June 30,

 

 

 

2007

 

2006

 

2007

 

2006

 

 

 

(In millions)

 

(In millions)

 

Weighted-average shares outstanding (basic)

 

134.9

 

128.1

 

129.9

 

128.6

 

Effect of dilutive securities:

 

 

 

 

 

 

 

 

 

Stock options

 

3.5

 

1.8

 

2.9

 

1.9

 

Long-term incentive plans

 

0.2

 

0.5

 

0.1

 

0.5

 

Weighted-average shares outstanding (diluted)

 

138.6

 

130.4

 

132.9

 

131.0

 

 

For the three and six months ended June 30, 2007, less than 0.1 million and 0.3 million options, respectively, were considered antidilutive and therefore excluded from this calculation. For the three and six months ended June 30, 2006, 0.7 million and 0.5 million options, respectively, were excluded from this calculation.

Purchased Intangible Assets.   Purchased intangible assets represent the estimated fair value of acquired intangible assets used in our business. Purchased data files represent the estimated fair value of files acquired primarily through the purchase of independent credit reporting agencies in the U.S. and Canada. We expense the cost of modifying and updating credit files in the period such costs are incurred. We generally amortize purchased data files, which primarily consist of acquired credit files, on a straight-line basis. All of our other purchased intangible assets are also amortized on a straight-line basis. See Notes 2 and 3 for additional information about our purchased intangible assets.

Asset

 

 

 

Useful Life

 

 

 

(in years)

 

Purchased data files

 

 

15

 

 

Acquired software and technology

 

 

3 to 10

 

 

Non-compete agreements

 

 

2 to 5

 

 

Proprietary database

 

 

6

 

 

Customer relationships

 

 

5 to 25

 

 

Trade names

 

 

2 to 10

 

 

 

Revenue Recognition.   As a result of our May 15, 2007 acquisition of TALX, we have expanded certain of our revenue recognition policies to account for our new operations. TALX revenues are generally recognized pursuant to annual or multi-year contracts.

Revenues from The Work Number business are realized primarily from transaction or monthly fees and, to a lesser degree, based on up-front set-up fees and periodic maintenance fees. Revenues for transaction fees are recognized in the period that they are earned, based on fees charged to users at the time they conduct verifications of employment and income. The revenue for set-up fees and monthly maintenance fees is recognized on a straight-line basis from the time the service is available to be used by our clients through the end of the service period.

Certain revenues from the Tax and Talent Management Services business are recognized in the period that they are earned, as the services are provided. Employment tax management revenue that is contingent

9




upon achieving certain performance criteria is recognized when those criteria are met. We realize revenues for our tax credits and incentives contracts on a contingent basis, as a percentage of the tax credits and incentives delivered to our clients.

In relationships with certain of our TALX customers, we enter into agreements with more than one of our service offerings included in the arrangement. In accordance with the consensus of Emerging Issues Task Force (“EITF”) Issue No. 00-21, “Revenue Arrangements with Multiple Deliverables,” as these fee arrangements are similar to those charged to other clients, we recognize revenue on the basis of the fair values of the underlying services.

Deferred revenue at June 30, 2007 principally represents the unearned portion of The Work Number set-up fees and employment tax management fees.

Recent Accounting Pronouncements.   In November 2005, Financial Accounting Standards Board Staff Position FAS No. 123(R)-3: “Transition Election Related to Accounting for the Tax Effects of Share-Based Payment Awards” (“FSP 123R-3’), was issued, which provides a practical or simplified transition election related to accounting for the tax effects of share-based payment awards to employees as opposed to the more detailed method provided in SFAS No. 123(R), “Share-Based Payment” (“SFAS 123R”). FSP 123R-3 allowed us to elect a transition method up to one year from the date of adoption of SFAS 123R. Accordingly, on January 1, 2007, we elected the simplified method as described in FSP123R-3. As a result of electing this transition method, we are required to retrospectively apply this method to our 2006 Consolidated Statement of Cash Flows since we were required to apply the more detailed method in SFAS 123R until we elected a transition method. The reclassification between cash provided by operating activities and cash provided by financing activities on our 2006 Consolidated Statement of Cash Flows as a result of electing the simplified method is not material.

In March 2007, the FASB ratified the consensus reached by the EITF related to EITF Issue No. 06-10, “Accounting for Deferred Compensation and Postretirement Benefit Aspects of Collateral Assignment Split-Dollar Life Insurance Arrangements” (“EITF 06-10”), which requires (1) the recognition of a liability related to postretirement benefits covered by collateral split-dollar life insurance arrangements since the employer has the obligation to provide the benefit to the employee and (2) to recognize and measure the asset based on the nature and substance of the arrangement. We have collateral split-dollar life insurance arrangements for certain employees of the Company. The liability is required to be recognized in accordance with SFAS No. 106, “Employers’ Accounting for Postretirement Benefits, Other Than Pensions,” or Accounting Principles Board (“APB”) Opinion No. 12, “Omnibus Opinion—1967,” as appropriate. For transition purposes, we may adopt EITF 06-10 as a change in accounting principle through either (1) retrospective application to all periods presented or (2) a cumulative-effect adjustment to retained earnings. We will be required to adopt EITF 06-10 on January 1, 2008. We are currently evaluating the impact of adopting EITF 06-10 on our Consolidated Financial Statements.

For additional recent accounting pronouncements pending adoption, see Note 1 of the Notes to Consolidated Financial Statements in our 2006 Form 10-K.

2.                 ACQUISITION

TALX Acquisition.   On May 15, 2007, we completed the acquisition of all of the outstanding shares of TALX Corporation (“TALX”), a leading provider of employment and income verification and human resources business process outsourcing services. The acquisition aligns with our long-term growth strategy of expanding into new markets with unique data. Under the terms of the transaction, we issued 20.6 million shares of Equifax common stock, issued 1.9 million fully-vested options to purchase Equifax common stock and paid approximately $269.0 million in cash, net of cash acquired, plus transaction costs of approximately $18.0 million. The fair value of options issued was determined using a binomial valuation model. The fair

10




value of the vested options is included in the total purchase price. The options have a weighted-average exercise price of $9.11 and a weighted-average remaining contractual term of 4.9 years. We also assumed TALX’s outstanding debt, which had a fair value totaling $177.6 million at May 15, 2007. We financed the cash portion of the acquisition with borrowings under our senior revolving credit facility. The results of TALX’s operations are included in our Consolidated Financial Statements beginning on May 15, 2007.

The TALX acquisition was recorded by allocating the cost of completing the acquisition to the assets acquired, including identifiable intangible assets and liabilities assumed, based on their estimated fair values at the acquisition date pursuant to SFAS No. 141, “Business Combinations” (“SFAS 141”). The excess of the cost of the acquisition over the net amounts assigned to the fair value of the assets acquired and the liabilities assumed was recorded as goodwill. The allocation below is preliminary, as the final valuation of certain intangible assets and tax contingencies has not been resolved.

The preliminary purchase price allocation is as follows:

 

 

(in millions)

 

Net tangible assets

 

 

$

49.1

 

 

Identifiable intangible assets*

 

 

571.9

 

 

Goodwill**

 

 

917.9

 

 

Long-term debt

 

 

(177.6

)

 

Long-term deferred income tax liabilities, net

 

 

(196.7

)

 

Net assets acquired

 

 

$

1,164.6

 

 


*                    Our preliminary valuation of identifiable intangible assets acquired includes the following:

 

 

 

 

Weighted-

 

 

 

 

 

average

 

 

 

 

 

remaining

 

Intangible asset category

 

 

 

Fair value

 

useful life

 

 

 

(in millions)

 

(in years)

 

Customer relationships

 

 

$

379.8

 

 

 

20.3

 

 

Proprietary database

 

 

120.5

 

 

 

5.9

 

 

Technology

 

 

38.2

 

 

 

3.9

 

 

Trade names

 

 

33.4

 

 

 

8.9

 

 

Total acquired intangibles

 

 

$

571.9

 

 

 

15.5

 

 

 

**             Of the $917.9 million in goodwill included in the preliminary purchase price allocation, all of which is allocated to the TALX operating segment, $107.5 million is tax deductible.

In connection with the TALX acquisition, our Board of Directors in February 2007 approved an increase in the amount of repurchases under our common stock repurchase program to $783.0 million. We expect to finance share repurchases using cash provided by operating activities, issuance of commercial paper or other borrowings. See Note 4 for additional information about our commercial paper program. During the three months ended June 30, 2007, we repurchased 4.2 million shares for $179.3 million.

Pro Forma Results.   The following pro forma financial information for the three and six months ended June 30, 2007 and 2006 presents the combined results of operations of Equifax and TALX as if the acquisition had occurred on January 1, 2007 and 2006, respectively. The combined results of operations have been adjusted for the impact of certain acquisition-related items, including additional amortization of identified intangible assets, additional financing expenses and other direct costs. The impact of pro forma adjustments are tax-effected at the expected future consolidated corporate tax rate.

The unaudited pro forma financial information is not intended to represent, or be indicative of, our consolidated results of operations or financial condition that would have been reported had the acquisition been completed as of the beginning of each of the periods presented. This information is provided for

11




illustrative purposes only and is not necessarily indicative of our future consolidated results of operations or financial condition.

 

 

Unaudited, Pro Forma

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

 

   2007   

 

   2006   

 

   2007   

 

   2006   

 

 

 

(in millions, except per share data)

 

Revenue

 

 

$

488.1

 

 

 

$

453.9

 

 

 

$

967.0

 

 

 

$

887.9

 

 

Operating income

 

 

$

124.2

 

 

 

$

100.9

 

 

 

$

252.8

 

 

 

$

216.8

 

 

Net income

 

 

$

70.8

 

 

 

$

68.3

 

 

 

$

143.2

 

 

 

$

131.4

 

 

Net income per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

$

0.46

 

 

 

$

0.46

 

 

 

$

0.95

 

 

 

$

0.88

 

 

Diluted

 

 

$

0.44

 

 

 

$

0.45

 

 

 

$

0.93

 

 

 

$

0.86

 

 

 

3.                 GOODWILL AND INTANGIBLE ASSETS

The allocation of the TALX purchase price to goodwill and intangible assets is preliminary, as the final valuation of certain intangible assets and tax contingencies has not been resolved. See Note 2 for additional information about the TALX acquisition.

Goodwill.   Goodwill represents the cost in excess of the fair value of the net assets acquired in a business combination. In accordance with SFAS No. 142, “Goodwill and Other Intangible Assets” (“SFAS 142”), goodwill is tested for impairment at the reporting unit level on an annual basis and on an interim basis if an event occurs or circumstances change that would reduce the fair value of a reporting unit below its carrying value. We perform our annual goodwill impairment test as of September 30.

As discussed in Note 9, we realigned our organization, effective January 1, 2007, which resulted in new reportable segments. To reflect this new organizational structure, we have reallocated goodwill to our new reporting units based on their relative fair value, as applicable, in accordance with SFAS 142. When reporting units are changed, SFAS 142 requires that goodwill be tested for impairment. During the first quarter of 2007, we performed our goodwill impairment test following the reallocation of goodwill, which resulted in no impairment.

Goodwill allocated to our reportable segments at December 31, 2006 under our prior organizational structure was as follows:

 

 

North American

 

Europe

 

Latin American

 

 

 

 

 

 

 

Operations

 

Operations

 

Operations

 

Corporate

 

Total

 

 

 

(In millions)

 

Balance, December 31, 2006

 

 

$

552.1

 

 

 

$

119.7

 

 

 

$

164.3

 

 

 

$

5.9

 

 

$

842.0

 

 

All of our reportable segments changed as a result of our organizational realignment effective January 1, 2007. Goodwill reallocated as a result of our organizational realignment as of January 1, 2007 and changes in the amount of goodwill for the six months ended June 30, 2007 are as follows:

 

 

U.S. Consumer

 

 

 

North America

 

North America

 

 

 

 

 

 

 

Information

 

 

 

Personal

 

Commercial

 

 

 

 

 

 

 

Solutions

 

International

 

Solutions

 

Solutions

 

TALX

 

Total

 

 

 

(in millions)

 

Balance, January 1, 2007*

 

 

$

491.4

 

 

 

$

310.7

 

 

 

$

1.8

 

 

 

$

38.1

 

 

$

 

$

842.0

 

Acquisitions

 

 

 

 

 

 

 

 

 

 

 

 

 

917.9

 

917.9

 

Purchase price adjustment

 

 

(0.2

)

 

 

 

 

 

 

 

 

0.1

 

 

 

(0.1

)

Foreign currency translation

 

 

 

 

 

18.2

 

 

 

 

 

 

0.5

 

 

 

18.7

 

Balance, June 30, 2007

 

 

$

491.2

 

 

 

$

328.9

 

 

 

$

1.8

 

 

 

$

38.7

 

 

$

917.9

 

$

1,778.5

 


*                    Date of goodwill reallocation based on organizational realignment, which changed our reportable segments.

12




Indefinite-Lived Intangible Assets.   Indefinite-lived intangible assets consist of contractual/territorial rights representing the estimated fair value of rights to operate in certain territories acquired through the purchase of independent credit reporting agencies in the U.S. and Canada. Our contractual/territorial rights are perpetual in nature and, therefore, the useful lives are considered indefinite. Indefinite-lived intangible assets are not amortized. In accordance with SFAS 142, we are required to test indefinite-lived intangible assets for impairment annually and whenever events or circumstances indicate that there may be an impairment of the asset value. We perform our annual indefinite-lived intangible asset impairment test as of September 30. During the six months ended June 30, 2007, contractual/territorial rights increased $0.3 million to $95.5 million due to foreign currency translation.

Purchased Intangible Assets.   Purchased intangible assets represent the estimated fair value of acquired intangible assets used in our business. All of our purchased intangible assets are amortized on a straight-line basis. See Note 1 for additional information about the useful lives related to our purchased intangible assets.

Purchased intangible assets at June 30, 2007 and December 31, 2006 consist of the following:

 

 

June 30, 2007

 

December 31, 2006

 

 

 

 

 

Accumulated

 

 

 

 

 

Accumulated

 

 

 

 

 

Gross

 

Amortization

 

Net

 

Gross

 

Amortization

 

Net

 

 

 

(In millions)

 

Definite-lived intangible assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Purchased data files

 

$

397.9

 

 

$

(203.0

)

 

$

194.9

 

$

390.8

 

 

$

(191.3

)

 

$

199.5

 

Acquired software and technology

 

78.6

 

 

(18.3

)

 

60.3

 

39.1

 

 

(15.7

)

 

23.4

 

Customer relationships

 

399.3

 

 

(4.8

)

 

394.5

 

18.5

 

 

(1.9

)

 

16.6

 

Proprietary database

 

120.5

 

 

(2.3

)

 

118.2

 

 

 

 

 

 

Non-compete agreements

 

6.2

 

 

(6.2

)

 

 

5.9

 

 

(4.6

)

 

1.3

 

Trade names

 

34.5

 

 

(1.4

)

 

33.1

 

2.0

 

 

0.6

 

 

1.4

 

Total definite-lived intangible assets

 

$

1,037.0

 

 

$

(236.0

)

 

$

801.0

 

$

456.3

 

 

$

(214.1

)

 

$

242.2

 

 

Amortization expense related to purchased intangible assets was $14.6 million and $7.7 million during the three months ended June 30, 2007 and 2006, respectively. Amortization expense related to purchased intangible assets was $22.4 million and $16.0 million during the six months ended June 30, 2007 and 2006, respectively. Estimated future amortization expense related to definite-lived purchased intangible assets at June 30, 2007 is as follows:

Years ending December 31,

 

 

 

Amount

 

 

 

(In millions)

 

Six months ending December 31, 2007

 

 

$

43.7

 

 

2008

 

 

86.2

 

 

2009

 

 

85.0

 

 

2010

 

 

82.5

 

 

2011

 

 

79.7

 

 

Thereafter

 

 

423.9

 

 

 

 

 

$

801.0

 

 

 

13




4.                 DEBT

Debt outstanding at June 30, 2007 and December 31, 2006 was as follows:

 

 

June 30,

 

December 31,

 

 

 

2007

 

2006

 

 

 

(In millions)

 

Commercial Paper

 

$

177.1

 

 

$

 

 

Notes, 4.95%, due November 2007

 

250.0

 

 

250.0

 

 

Notes, 7.34%, due May 2014

 

75.0

 

 

 

 

Notes, 6.30%, due July 2017

 

300.0

 

 

 

 

Debentures, 6.90%, due July 2028

 

150.0

 

 

150.0

 

 

Notes, 7.00%, due July 2037

 

250.0

 

 

 

 

Trade receivables-backed revolving credit facility

 

 

 

80.0

 

 

Borrowings under long-term revolving credit facilities

 

 

 

25.0

 

 

Other

 

0.1

 

 

0.1

 

 

Total debt

 

1,202.2

 

 

505.1

 

 

Less short-term debt and current maturities

 

(427.2

)

 

(330.0

)

 

Less long-term unamortized discounts

 

(2.3

)

 

(1.2

)

 

Plus fair value adjustment

 

5.9

 

 

 

 

Total long-term debt, net

 

$

778.6

 

 

$

173.9

 

 

 

Senior Credit Facility.   During the second quarter, we amended our senior unsecured revolving credit facility with a group of financial institutions (the “Senior Credit Facility”) to increase the borrowing limit from $500.0 million to $850.0 million. Borrowings may be used for general corporate purposes, including working capital, capital expenditures, acquisitions and share repurchase programs. The Senior Credit Facility expires in July 2011. At June 30, 2007, no amounts were outstanding under the Senior Credit Facility.

Commercial Paper Program.   On May 22, 2007, we established an $850.0 million commercial paper program in which borrowings bear interest at either a variable rate (based on LIBOR or other benchmarks) or a fixed rate, with the applicable rate and margin established through private placement of commercial paper notes from time to time. Maturities of commercial paper can range from overnight to 397 days. We use commercial paper issuances as a primary instrument for general corporate purposes. Since the commercial paper program is backstopped by our Senior Credit Facility, the amount of commercial paper which may be issued under the program is reduced by the amount of any outstanding borrowings under our Senior Credit Facility. To the extent commercial paper borrowings bear interest at a variable rate, the Company has interest rate risk when such debt is outstanding. At June 30, 2007, $177.1 million in commercial paper notes were outstanding, at a weighted-average fixed interest rate of 5.41% per annum, all with maturities of less than 90 days.

TALX Debt.   At the closing of the TALX acquisition in May 2007, we assumed $75.0 million in 7.34% Senior Guaranteed Notes (“TALX Notes”) privately placed by TALX with several institutional investors in May 2006 and $96.6 million outstanding under TALX’s revolving credit facility. We are required to repay the principal amount of the TALX Notes in five equal annual installments commencing on May 25, 2010 with a final maturity date of May 25, 2014. We may prepay the TALX Notes subject to certain restrictions and the payment of a make-whole amount. Under certain circumstances, we may be required to use proceeds of certain asset dispositions to prepay a portion of the TALX Notes. Interest on the TALX Notes is payable semiannually until the principal becomes due and payable. We identified a fair value adjustment related to the TALX Notes in applying purchase accounting; this amount will be amortized against interest expense over the remainder of the term of the TALX Notes. At June 30, 2007, the remaining balance of this adjustment is $5.9 million and is included in long-term debt on the Consolidated Balance Sheet. Subsequent to the TALX acquisition, we repaid and terminated the TALX revolving credit facility with

14




borrowings under our Senior Credit Facility. See Note 2 for additional information about the TALX acquisition.

6.3% and 7.0% Senior Notes.   On June 28, 2007, we issued $300.0 million principal amount of 6.3%, ten-year senior notes and $250.0 million principal amount of 7.0%, thirty-year senior notes (collectively, the “Notes”) in underwritten public offerings. Interest is payable semi-annually in arrears on January 1 and July 1 of each year, beginning January 1, 2008. The net proceeds of the financing have been or will be used to repay short-term indebtedness, a substantial portion of which was incurred in connection with our acquisition of TALX. We must comply with various non-financial covenants, including certain limitations on liens, additional debt and mortgages, mergers, asset dispositions and sale-leaseback arrangements. The Notes are unsecured and rank equally with all of our other unsecured and unsubordinated indebtedness. Debt issuance costs capitalized under these offerings totaled approximately $4.0 million. The original issuance discount on these offerings totaled $1.3 million.

In conjunction with the sale of the Notes, we entered into cash flow hedges on $200.0 million and $250.0 million notional amount, respectively, of ten-year and thirty-year Treasury notes. These hedges were settled on June 25 and June 26, 2007, the dates the Notes were sold, requiring payment of $1.9 million and $3.0 million, respectively. Pursuant to SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” the impact of these settlements has been recorded in other comprehensive income and will be amortized against interest expense over the respective terms of the Notes.

Trade Receivables-Backed Revolving Credit Facility.   We are party to a trade receivables-backed, revolving credit facility under which a wholly-owned subsidiary of Equifax may borrow up to $125.0 million, subject to borrowing base availability and other terms and conditions, for general corporate purposes. Based on the calculation of the borrowing base applicable at June 30, 2007, $106.5 million was available for borrowing and there were no outstanding borrowings under this facility, which is included in short-term debt and current maturities on our Consolidated Balance Sheet.

Canadian Credit Facility.   We are a party to a credit agreement with a Canadian financial institution that provides for a C$25.0 million (denominated in Canadian dollars), 364-day revolving credit agreement. During the six months ended June 30, 2007, there was no activity under this facility. At June 30, 2007, there were no outstanding borrowings under this facility.

For additional information about these revolving credit facilities, see Note 5 of the Notes to Consolidated Financial Statements in our 2006 Form 10-K.

5.                 COMMITMENTS AND CONTINGENCIES

Headquarters Lease.   Other than leasing arrangements, we do not engage in off-balance sheet financing activities. Under the terms of the $29.0 million operating lease for our headquarters building in Atlanta, Georgia, which commenced in 1998 and expires in 2010, we have guaranteed a portion of the residual value of the building at the end of the lease. Total lease payments for the remaining term total $5.0 million. Under this synthetic lease arrangement, we have also guaranteed the residual value of the leased property to the lessor. In the event that the property were to be sold by the lessor at the end of the lease term, we would be responsible for any shortfall of the sales proceeds, up to a maximum amount of $23.2 million, which equals 80% of the value of the property at the beginning of the lease term. The liability for this estimated shortfall, which we estimated at $1.4 million at June 30, 2007 and December 31, 2006, is recorded in other long-term liabilities on our Consolidated Balance Sheets.

Data Processing, Outsourcing Services and Other Agreements.   We have separate agreements with International Business Machines Corporation (“IBM”), Acxiom and others to outsource portions of our computer data processing operations and related functions, and certain other administrative and operational services. The agreements expire between 2007 and 2013. The estimated aggregate minimal contractual obligation remaining under these agreements is approximately $330.0 million as of

15




December 31, 2006, with no future year’s minimum contractual obligation expected to exceed approximately $75.0 million. Annual payment obligations in regard to these agreements vary due to factors such as the volume of data processed; changes in our servicing needs as a result of new product offerings, acquisitions or divestitures; the introduction of significant new technologies; foreign currency; or the general rate of inflation. Our data processing outsourcing agreement with IBM was renegotiated in 2003 for a ten-year term. Under this agreement (which covers our operations in North America, Europe, Brazil and Chile), we have outsourced our mainframe and midrange operations, help desk service and desktop support functions, and the operation of our voice and data networks. The scope of such services varies by location. During the twelve months ended December 31, 2006, 2005 and 2004, we paid $112.1 million, $120.8 million and $110.5 million, respectively, for these services. The estimated future minimum contractual obligation at December 31, 2006 under this agreement is $290.7 million, with no year’s minimum contractual obligation expected to exceed approximately $45.0 million. In certain circumstances (e.g., a change in control or for our convenience), we may terminate these data processing and outsourcing agreements, and, in doing so, certain of these agreements require us to pay a significant penalty. Additionally, we may terminate these agreements without penalty in the event that IBM is in material breach of the terms of the agreement.

Agreement with Computer Sciences Corporation.   We have an agreement with Computer Sciences Corporation and certain of its affiliates, collectively CSC, under which CSC-owned credit reporting agencies utilize our computerized credit database services. CSC retains ownership of its credit files and the revenues generated by its credit reporting activities. We receive a processing fee for maintaining the database and for each report supplied. The agreement expires July 31, 2008 and is renewable at the option of CSC for successive ten-year periods. The agreement provides us with an option to purchase CSC’s credit reporting business if it does not elect to renew the agreement or if there is a change in control of CSC while the agreement is in effect. Under the agreement, CSC also has an option, exercisable at any time, to sell its credit reporting business to us. The option expires in 2013. The option exercise price will be determined by a third-party appraisal process and would be due in cash within 180 days after the exercise of the option. We estimate that if the option were exercised at December 31, 2006, the price range would approximate $650.0 million to $725.0 million. This estimate is based solely on our internal analysis of the value of the businesses, current market conditions and other factors, all of which are subject to constant change. Therefore, the actual option exercise price could be materially higher or lower than the estimated amount.

Guarantees.   We will from time to time issue standby letters of credit, performance bonds or other guarantees in the normal course of business. The aggregate notional amount of all performance bonds and standby letters of credit were not material at June 30, 2007, and all have a maturity of one year or less. Guarantees are issued from time to time to support the needs of operating units. We also guarantee the operating lease payments of a lease between third parties. The operating lease, which expires December 31, 2011, has a remaining balance of $6.0 million based on the undiscounted value of remaining lease payments, including real estate taxes, at June 30, 2007. We believe that the likelihood of demand for payment by us is minimal and expect no material losses to occur related to this guarantee. Accordingly, we do not have a liability on our Consolidated Balance Sheets at June 30, 2007 or December 31, 2006 related to this guarantee.

General Indemnifications.   We are the lessee under many real estate leases. It is common in these commercial lease transactions for us, as the lessee, to agree to indemnify the lessor and other related third parties for tort, environmental and other liabilities that arise out of or relate to our use or occupancy of the leased premises. This type of indemnity would typically make us responsible to indemnified parties for liabilities arising out of the conduct of, among others, contractors, licensees and invitees at or in connection with the use or occupancy of the leased premises. This indemnity often extends to related liabilities arising from the negligence of the indemnified parties, but usually excludes any liabilities caused by either their sole or gross negligence and their willful misconduct.

16




Certain of our credit agreements include provisions which require us to make payments to preserve an expected economic return to the lenders if that economic return is diminished due to certain changes in law or regulations. In certain of these credit agreements, we also bear the risk of certain changes in tax laws that would subject payments to non-U.S. lenders to withholding taxes.

In conjunction with certain transactions, such as sales or purchases of operating assets or services in the ordinary course of business, or the disposition of certain assets or businesses, we sometimes provide routine indemnifications, the terms of which range in duration and sometimes are not limited.

We cannot reasonably estimate our potential future payments under the indemnities and related provisions described above because we cannot predict when and under what circumstances these provisions may be triggered. We have no accrual related to indemnifications on our Consolidated Balance Sheets at June 30, 2007 and December 31, 2006.

Contingencies.   We are involved in legal proceedings, claims and litigation arising in the ordinary course of business. We periodically assess our exposure related to these matters based on the information which is available. In accordance with SFAS No. 5, “Accounting for Contingencies,” we have recorded accruals in our Consolidated Financial Statements for those matters in which it is probable that we have incurred a loss and the amount of the loss, or range of loss, can be reasonably estimated.

For other legal proceedings, claims and litigation, we have recorded loss contingencies that are immaterial, or we cannot reasonably estimate the potential loss because of uncertainties about the outcome of the matter and the amount of the loss or range of loss. We also accrue for unpaid legal fees for services performed to date. Although the final outcome of these other matters cannot be predicted with certainty, any possible adverse outcome arising from these matters is not expected to have a material impact on our Consolidated Financial Statements, either individually or in the aggregate. However, our evaluation of the likely impact of these matters may change in the future.

Tax Matters.   In 2003, the Canada Revenue Agency (“CRA”) issued Notices of Reassessment, asserting that Acrofax, Inc., a wholly-owned Canadian subsidiary of Equifax, is liable for additional tax for the 1995 through 2000 tax years, related to certain intercompany capital contributions and loans. The additional tax sought by the CRA for these periods ranges, based on alternative theories, from $8.1 million ($8.5 million in Canadian dollars) to $17.9 million ($19.0 million in Canadian dollars) plus interest and penalties. Subsequently in 2003, we made a statutorily-required deposit for a portion of the claim. We intend to vigorously contest these reassessments and do not believe we have violated any statutory provision or rule. While we believe our potential exposure is less than the asserted claims and not material to our Consolidated Financial Statements, if the final outcome of this matter was unfavorable to us, an additional claim may be filed by the local province. The likelihood and potential amount of such claim is unknown at this time. We cannot predict when this tax matter will be resolved.

For additional information about these and other commitments and contingencies, see Note 6 of the Notes to Consolidated Financial Statements in our 2006 Form 10-K.

6.                 INCOME TAXES

In July 2006, the FASB issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes—An Interpretation of FASB Statement No. 109” (“FIN 48”), which provides clarification related to the process associated with accounting for uncertain tax positions recognized in our Consolidated Financial Statements. FIN 48 prescribes a more-likely-than-not threshold for financial statement recognition and measurement of a tax position taken, or expected to be taken, in a tax return. FIN 48 also provides guidance related to, among other things, classification, accounting for interest and penalties associated with tax positions, and disclosure requirements. We adopted FIN 48 on January 1, 2007. For transition purposes, we adopted FIN 48 as a change in accounting principle through a cumulative-effect adjustment

17




to retained earnings. The impact of our reassessment of our tax positions in accordance with the requirements of FIN 48 was immaterial to our Consolidated Financial Statements.

We recognize interest and penalties accrued related to unrecognized tax benefits in the provision for income taxes on our Consolidated Statements of Income. Our classification of interest and penalties did not change as a result of adopting FIN 48.

We have a $31.7 million liability recorded for unrecognized tax benefits as of January 1, 2007, which includes interest and penalties of $5.8 million. The total amount of unrecognized benefits that, if recognized, would affect the effective tax rate is $26.7 million, which includes interest and penalties of $3.8 million. There have not been any material changes in our liability for unrecognized tax benefits, including interest and penalties, during the six months ended June 30, 2007. We do not currently anticipate that the total amount of unrecognized tax benefits will significantly increase or decrease within the next twelve months.

Equifax and its subsidiaries are subject to U.S federal, state and international income taxes. We are generally no longer subject to federal, state, or international income tax examinations by tax authorities for years before 2002, with few exceptions including those discussed below for Canada and the U.K. In Canada, we are under audit by the Canada Revenue Agency for the 1995 through 2002 tax years (see Note 5 of the Notes to Consolidated Financial Statements). For the U.K., tax years after 1999 are open.

Effective Tax Rate.   Our effective income tax rate was 35.8% for the three months ended June 30, 2007, up from 31.8% for the same period in 2006 due primarily to a $14.1 million non-taxable litigation settlement gain recorded during the second quarter of 2006. Additionally, the June 30, 2007 rate reflects a lower foreign and state tax rate compared to the June 30, 2006 rate and a favorable discrete item related to our foreign tax credit utilization. The effective income tax rate was 36.1% for the six months ended June 30, 2007, up from 34.7% for the same period in 2006 due to the same factors discussed above.

7.                 BENEFIT PLANS

We have defined benefit pension plans and defined contribution plans. Substantially all U.S., Canadian and U.K. employees participate in one or more of these plans. We also maintain certain health care and life insurance benefit plans for eligible retired employees.

The following table provides the components of net periodic benefit cost for the three months ended June 30, 2007 and 2006:

 

 

Pension Benefits

 

Other Benefits

 

 

 

Three Months Ended June 30,

 

 

 

2007

 

2006

 

2007

 

2006

 

 

 

(In millions)

 

Service cost

 

 

$

2.6

 

 

 

$

2.4

 

 

$

0.1

 

$

0.1

 

Interest cost

 

 

8.3

 

 

 

8.0

 

 

0.4

 

0.4

 

Expected return on plan assets

 

 

(10.6

)

 

 

(10.3

)

 

(0.3

)

(0.3

)

Amortization of prior service cost

 

 

0.2

 

 

 

0.1

 

 

0.1

 

0.1

 

Recognized actuarial loss

 

 

2.2

 

 

 

2.5

 

 

0.1

 

 

Total net periodic benefit cost

 

 

$

2.7

 

 

 

$

2.7

 

 

$

0.4

 

$

0.3

 

 

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The following table provides the components of net periodic benefit cost for the six months ended June 30, 2007 and 2006:

 

 

Pension Benefits

 

Other Benefits

 

 

 

Six Months Ended June 30,

 

 

 

2007

 

2006

 

2007

 

2006

 

 

 

(In millions)

 

Service cost

 

 

$

5.2

 

 

 

$

4.8

 

 

$

0.2

 

$

0.2

 

Interest cost

 

 

16.6

 

 

 

16.0

 

 

0.9

 

0.8

 

Expected return on plan assets

 

 

(21.3

)

 

 

(20.5

)

 

(0.7

)

(0.6

)

Amortization of prior service cost

 

 

0.5

 

 

 

0.3

 

 

0.2

 

0.2

 

Recognized actuarial loss

 

 

4.4

 

 

 

5.0

 

 

0.1

 

0.1

 

Total net periodic benefit cost

 

 

$

5.4

 

 

 

$

5.6

 

 

$

0.7

 

$

0.7

 

 

8.                 RELATED PARTY TRANSACTIONS

SunTrust Bank, N.A. (“SunTrust”) and Bank of America, N.A. (“Bank of America”) are both considered related parties in accordance with SFAS No. 57, “Related Party Disclosures,” since members of our Board of Directors have affiliations with these companies. The following transactions during the second quarter of 2007 involved related parties:

·       SunTrust Robinson Humphrey, a subsidiary of SunTrust, and Banc of America Securities, LLC, a subsidiary of Bank of America, each increased their lending commitments to $115.0 million under our Senior Credit Facility when we increased the aggregate borrowing limit under this facility to $850.0 million.

·       These two companies also serve as dealers under our commercial paper program. Fees paid to the dealers related to our issuance of commercial paper during the second quarter of 2007 are less than $0.1 million.

·       Banc of America Securities, LLC and SunTrust Robinson Humphrey served as underwriters for our public offering of $550.0 million of Notes in June 2007 for which they were paid underwriting fees of approximately $1.4 million and $0.4 million, respectively.

There have not been any other material changes in transactions with related parties, other than those discussed in Note 13 of the Notes to Consolidated Financial Statements in our 2006 Form 10-K.

9.                 SEGMENT INFORMATION

Organizational Realignment.   Effective January 1, 2007, we implemented certain organizational changes as result of a strategic review of our business. The changes to our internal structure changed our operating segments to the following: U.S. Consumer Information Solutions, International, North America Personal Solutions and North America Commercial Solutions. U.S. Consumer Information Solutions consists of the former Marketing Services and North America Information Services, excluding U.S. Commercial Services and Canada. North America Commercial Solutions represents our former commercial business for the U.S. and Canada that was within North America Information Services as well as our October 2006 acquisition of Austin-Tetra. International consists of our consumer business in Canada and all of our businesses in Europe and Latin America. North America Personal Solutions remains unchanged. Our financial results for the three and six months ended June 30, 2006 and as of December 31, 2006, have been recast below to reflect our new organizational structure.

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Reportable Segments.   Effective with our organizational realignment on January 1, 2007 and the acquisition of TALX on May 15, 2007, we manage our business and report our financial results through the following five reportable segments, which are the same as our operating segments:

·       U.S. Consumer Information Solutions

·       International

·       North America Personal Solutions

·       North America Commercial Solutions

·       TALX

With the exception of the revenue recognition and intangible asset policies discussed in Note 1, the accounting policies of the reportable segments are the same as those described in our summary of significant accounting policies (see Note 1 of the Notes to Consolidated Financial Statements in our 2006 Form 10-K). We evaluate the performance of these reportable segments based on their operating revenues, operating income and operating margins, excluding any unusual or infrequent items, if any. Inter-segment sales and transfers are not material for all periods presented. The measurement criteria for segment profit or loss and segment assets are substantially the same for each reportable segment. All transactions between segments are accounted for at cost, and no timing differences occur between segments.

A summary of segment products and services under our new organizational structure is as follows:

U.S. Consumer Information Solutions.   This segment includes consumer information services (such as credit information and credit scoring, credit modeling services, locate services, fraud detection and prevention services, identity verification services and other consulting services); mortgage loan origination information services; credit card marketing services; and consumer demographic and lifestyle information services.

International.   This segment includes information services products, which includes consumer and commercial services (such as credit and financial information, credit scoring and credit modeling services), credit marketing products and services, and products and services sold directly to consumers.

North America Personal Solutions.   This segment includes credit monitoring and identity theft protection products sold directly to consumers via the Internet and in various hard-copy formats.

North America Commercial Solutions.   This segment includes commercial products and services such as business credit information, credit scores and portfolio analytics (decisioning tools), which are derived from our databases of business credit and financial information.

TALX.   This segment includes employment and income verification services (known as The Work Number) and employment tax and talent management services.

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Operating revenue and operating income by operating segment, as well as operating revenue by product and service line, or geographic region within our operating segments, during the three and six months ended June 30, 2007 and 2006 are as follows:

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

Operating revenue:

 

 

 

    2007    

 

    2006    

 

    2007    

 

    2006    

 

 

 

(in millions)

 

U.S. Consumer Information Solutions

 

 

$

250.0

 

 

 

$

245.4

 

 

 

$

497.1

 

 

 

$

486.0

 

 

International

 

 

115.3

 

 

 

100.2

 

 

 

221.0

 

 

 

192.8

 

 

North America Personal Solutions

 

 

38.6

 

 

 

31.2

 

 

 

76.6

 

 

 

61.8

 

 

North America Commercial Solutions

 

 

15.3

 

 

 

10.9

 

 

 

29.7

 

 

 

21.1

 

 

TALX

 

 

35.3

 

 

 

 

 

 

35.3

 

 

 

 

 

Total operating revenue

 

 

$

454.5

 

 

 

$

387.7

 

 

 

$

859.7

 

 

 

$

761.7

 

 

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

Operating income:

 

 

 

    2007    

 

    2006    

 

    2007    

 

    2006    

 

 

 

(in millions)

 

U.S. Consumer Information Solutions

 

 

$

101.0

 

 

 

$

102.0

 

 

 

$

202.8

 

 

 

$

201.8

 

 

International

 

 

33.5

 

 

 

29.8

 

 

 

65.9

 

 

 

56.5

 

 

North America Personal Solutions

 

 

7.4

 

 

 

(11.3

)

 

 

13.6

 

 

 

(10.4

)

 

North America Commercial Solutions

 

 

1.0

 

 

 

1.5

 

 

 

2.3

 

 

 

2.7

 

 

TALX

 

 

4.5

 

 

 

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