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DUN & BRADSTREET CORP/NW
Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Commission file number 1-15967
The Dun & Bradstreet Corporation
(State of incorporation) (I.R.S. Employer Identification No.)
103 JFK Parkway, Short Hills, NJ 07078
Name of each exchange on which registered
Common Stock, par value $0.01 per share
Preferred Share Purchase Rights
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes x No ¨
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes ¨ No x
Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ¨ No ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer", "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer x Accelerated filer ¨ Non-accelerated filer ¨ Smaller reporting company ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
As of June 30, 2009, the aggregate market value of all shares of Common Stock of The Dun & Bradstreet Corporation outstanding and held by nonaffiliates* (based upon its closing transaction price on the New York Stock Exchange Composite Tape on June 30, 2009) was approximately $4.256 billion.
As of January 31, 2010, 50,998,069 shares of Common Stock of The Dun & Bradstreet Corporation were outstanding.
Portions of the registrant's definitive proxy statement for use in connection with its annual meeting of shareholders scheduled to be held on May 4, 2010, are incorporated into Part III of this Form 10-K.
* Calculated by excluding all shares held by executive officers and directors of the registrant. Such exclusions will not be deemed to be an admission that all such persons are "affiliates" of the registrant for purposes of federal securities laws.
Item 1B.
Unresolved Staff Comments
Submission of Matters to a Vote of Security Holders
Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Selected Financial Data
Management's Discussion and Analysis of Financial Condition and Results of Operations
Financial Statements and Supplementary Data
Consolidated Statement of Operations
Consolidated Statement of Shareholders' Equity (Deficit)
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 10.
Directors, Executive Officers and Corporate Governance
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Certain Relationships and Related Transactions and Director Independence
Principal Accountant Fees and Services
Exhibits and Financial Statement Schedules
Item 1. Business
The Dun & Bradstreet Corporation ("D&B" or "we" or "our" or the "Company") is the world's leading source of commercial information and insight on businesses, enabling customers to Decide with Confidence® for over 168 years. Our global commercial database contains more than 150 million business records. The database is enhanced by our proprietary DUNSRight® Quality Process, which provides our customers with quality business information. This quality information is the foundation of our global solutions that customers rely on to make critical business decisions.
D&B provides solution sets that meet a diverse set of customer needs globally. Customers use D&B Risk Management Solutions™ to mitigate credit and supplier risk, increase cash flow and drive increased profitability; D&B Sales & Marketing Solutions™ to increase revenue from new and existing customers; and D&B Internet Solutions™ to convert prospects into clients faster by enabling business professionals to research companies, executives and industries.
Our Aspiration and Our Strategy
Our strategy reflects that D&B is a company that has been and remains committed to delivering Total Shareholder Return ("TSR"). To achieve this objective, we remain focused on three key drivers of TSR over time: revenue growth; margin expansion; and maintaining a disciplined approach to deploying our free cash flow. These have been the central drivers of our success, and they will remain the key areas of focus for us going forward. We continue to execute our strategy in the following ways:
First, we remain focused on the commercial marketplace and continuing to be the world's largest and best provider of insight about businesses. This is reflected in our aspiration, which is "To be the most trusted source of commercial insight so our customers can Decide with Confidence®."
Second, maintaining our fundamental competitive advantage in the market place (i.e. data quality), We will continue to improve our data quality through better coverage and we will provide new value to our customers by leveraging recent advances in technology.
Third, we will leverage our data assets to better enhance our products and services within our three solution sets: Risk Management Solutions business ("RMS"), Sales & Marketing Solutions business ("S&MS") and Internet Solutions. To accomplish this, we will invest in a new technology platform that is scalable and far more agile, so we can meet emerging customer demands faster, and at a much lower cost over time.
Our strategy relies on four core competitive advantages that support our commitment to driving TSR and our aspiration to be the most trusted source of commercial insight so our customers can Decide with Confidence®. These core competitive advantages include our:
Trusted Brand;
DUNSRight Quality Process;
Winning Culture; and
Financial Flexibility.
For the reasons described below, we believe that these core competitive advantages will continue to drive our growth and profitability going forward.
The D&B® brand dates back to the founding of our company in 1841. We believe that the D&B brand is unique in the marketplace, standing for trust and confidence in commercial insight; our customers rely on D&B and the quality of our brand when they make critical business decisions.
DUNSRight Quality Process
DUNSRight is our proprietary quality process that powers all of our customer solution sets and serves as our key strategic differentiator as a commercial insight company.
The foundation of our DUNSRight Quality Process is Quality Assurance, which includes over 2,000 separate automated and manual checks to ensure that data meets our high quality standards.
In addition, our five DUNSRight Quality Drivers work sequentially to enhance the data and make it useful to our customers in making critical business decisions.
The process works as follows:
Global Data Collection brings together data from a variety of sources worldwide;
We integrate the data into our database through our patented Entity Matching, which produces a single, more accurate picture of each business;
We apply the D-U-N-S® Number as a unique means of identifying and tracking a business globally throughout every step in the life and activity of the business;
We use Corporate Linkage to enable our customers to view their total risk or opportunity across related businesses; and
Finally, our Predictive Indicators use statistical analysis to rate a business' past performance, to predict how a business is likely to perform in the future.
Winning Culture
Our culture is focused on developing strong leaders, because we believe that great leadership drives great results, improves customer satisfaction and helps increase TSR. To build such leadership, we have developed and deployed a consistent, principles-based leadership model throughout our Company.
Our leadership development process ensures that team member performance goals and financial rewards are linked to our strategy. In addition, we link a component of the compensation of each of our senior leaders to our overall financial results. Our leadership development process also enables team members, which include our management and employees, to receive ongoing feedback on their performance goals and on their leadership. All
team members are expected to have personal leadership action plans that are focused on their own personal development, building on their leadership strengths and working on their areas of development.
We have a talent assessment process that provides a framework to assess and improve skill levels and performance across the organization and which acts as a tool to aid talent development and succession planning. We also administer an employee engagement survey that enables team members worldwide to provide feedback on areas that will improve their performance, drive customer satisfaction and evolve our winning culture.
Financial Flexibility
Financial Flexibility is an ongoing process that reallocates our spending from low-growth or low-value activities to activities that will create greater value for shareholders through enhanced revenue growth, improved profitability and/or quality improvements. We are committed through this process to examining how every dollar is spent, and optimizing between variable and fixed costs to ensure flexibility in changes to our operating expense base as we make strategic choices. This enables us to continually and systematically identify improvement opportunities in terms of quality, cost and customer experience. In executing our Financial Flexibility process we seek to improve, standardize, consolidate and automate our business functions.
We currently manage and report our business globally through two segments:
North America (which consists of our operations in the United States ("U.S.") and Canada); and
International (which consists of our operations in Europe, Asia Pacific and Latin America).
As of January 1, 2009, we began managing our operations in Canada as part of our renamed "North America" segment (formerly our U.S. segment) and have reclassified our historical results set forth in this Annual Report on Form 10-K to reflect this change. Prior to January 1, 2009, we reported the results of our Canadian operations together with our International segment.
North America. Our North America segment accounted for 78%, 79% and 81% of our total revenue for the years ended December 31, 2009, 2008 and 2007, respectively.
International. We conduct business internationally through our wholly-owned subsidiaries, joint ventures that we hold a majority interest in, independent correspondents, strategic relationships through our D&B Worldwide Network® and minority equity investments. The International segment, which primarily represents revenue generated through our subsidiaries, accounted for 22%, 21% and 19 % of our total revenue for the years ended December 31, 2009, 2008 and 2007, respectively.
Since 2000, we have entered into strategic relationships with strong local players throughout the world that we do not control and who have become part of our D&B Worldwide Network, operating under commercial agreements. Our D&B Worldwide Network enables our customers globally to make business decisions with confidence, because we incorporate data from the members of the D&B Worldwide Network that has been put through the DUNSRight Quality Process into our database and utilize it in our customer solutions. Our customers, therefore, have access to a more powerful database and global solution sets they can rely on to make their risk management, sales and marketing decisions. Over the last few years, we have strengthened our position in our International segment through majority-owned joint ventures in Japan, China and India.
In addition, we have from time-to-time, acquired complementary businesses, products and technologies. For example:
In 2007, we acquired First Research, Inc., Purisma Incorporated, AllBusiness.com, Inc. and substantially all of the assets of n2 Check Limited and substantially all of the assets and certain liabilities of the Education Division of Automation Research, Inc., d/b/a MKTG Services;
In 2007, we established majority owned joint ventures in China with Huaxia International Credit Consulting Co. Ltd. and in Japan with Tokyo Shoko Research;
In 2008, we established majority-owned joint ventures in China with Beijing Huicong International Information Co., Ltd., and we increased our indirect minority ownership stake in Dun & Bradstreet Information Services India Private Limited ("D&B India") to a 53% direct majority ownership; and
In 2009, we acquired substantially all of the assets of Bisnode's UK operations and a 100% equity interest in Bisnode's Irish operations ("ICC"), we acquired all of the assets and assumed certain liabilities related to Quality Education Data and we acquired a 90% equity interest in RoadWay International Limited ("RoadWay"), the leading provider of integrated services of direct marketing in China. As part of the RoadWay transaction, D&B Huaxia, our existing joint venture company with Huaxia in China, transferred its Sales & Marketing Solutions business to RoadWay.
Segment data and other information for the years ended December 31, 2009, 2008 and 2007 are included in Note 14 to our consolidated financial statements included in Item 8. of this Annual Report on Form 10-K.
Our Customer Solutions and Services
Risk Management Solutions is our largest customer solution set, accounting for 64%, 62% and 62% of our total revenue for the years ended December 31, 2009, 2008 and 2007, respectively. Within this customer solution set we offer traditional and value-added solutions. Our traditional solutions, which includes our DNBi® Solution and also consists of reports from our database used primarily for making decisions about new credit applications, constituted 75% of our Risk Management Solutions revenue and 48% of our total revenue for the year ended December 31, 2009. Our value-added solutions, which constituted 20% of our Risk Management Solutions revenue and 12% of our total revenue for the year ended December 31, 2009, generally support automated decision-making and portfolio management through the use of scoring and integrated software solutions. See Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations of this Annual Report on Form 10-K for a discussion of trends in this customer solutions set.
On January 1, 2008, we began managing our Supply Management business as part of our Risk Management Solutions business. This is consistent with our overall strategy and also reflects customers' needs to better understand the financial risk of their supply chain. As a result, the contributions of the Supply Management business are now reported as a part of Risk Management Solutions, as set forth above.
Our Risk Management Solutions help customers increase cash flow and profitability while mitigating credit, operational and regulatory risks by helping them answer questions such as:
Should I extend credit to this new customer?
What credit limit should I set?
Will this customer pay me on time?
How can I avoid supply chain disruption?
How do I know whether I am in compliance with regulatory acts?
Our principal Risk Management Solutions are:
DNBi, our interactive, customizable online application that offers our customers real time access to our most complete and up-to-date global DUNSRight information, comprehensive monitoring and portfolio analysis;
Our Business Information Report, our Comprehensive Report, and our International Report, which provide overall profiles of a company, including, based on the report type, financial information, payment information, history of a business, ownership details, operational information and similar information;
Our Self Awareness Solutions, which allow our small business customers to establish, improve and protect their own credit;
Our decisioning scores, which help assess the credit risk of a business by assigning a rating or score; and
Supply Lifecycle Risk Management™, which is an online solution that allows customers to standardize their supplier registration and evaluation process by creating a single point of entry with consistent procedures.
Certain of our solutions are available on a subscription pricing basis, such as our Preferred Pricing Agreement with DNBi. Our subscription pricing plans, which continue to represent an increasing proportion of our revenue, provide increased access to our Risk Management reports and data to help customers increase their profitability while mitigating their risk.
Sales & Marketing Solutions
Sales & Marketing Solutions is our second-largest customer solution set accounting for 28% of our total revenue for each of the years ended December 31, 2009, 2008 and 2007. Within this customer solution set we offer traditional and value-added solutions. Our traditional solutions generally consist of marketing lists, labels and customized data files used by our customers in their direct mail and marketing activities. These solutions constituted 40% of our Sales & Marketing Solutions revenue and 11% of our total revenue for the year ended December 31, 2009. Our value-added solutions generally include decision-making and customer information management solutions. These value-added solutions constituted 60% of Sales & Marketing Solutions revenue and 17% of our total revenue for the year ended December 31, 2009. See Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations of this Annual Report on Form 10-K for a discussion of trends in this customer solutions set.
Our Sales & Marketing Solutions help customers increase revenue from new and existing customers by helping them answer questions such as:
Who are my best customers?
How can I find prospects that look like my best customers?
How can I exploit untapped opportunities with my existing customers?
How can I allocate sales force resources to revenue growth potential?
Our principal Sales & Marketing Solutions are:
Our solutions for Customer Data Integration, which are a suite of solutions that cleanse, identify, link and enrich customer information with our DUNSRight Quality Process. Our D&B Optimizer™ solution, for example, uses our DUNSRight Quality Process to transform customer prospects and files into up-to-date, accurate and actionable commercial insight, enabling a single customer view across multiple systems and touchpoints, such as marketing and billing databases and better enabling a customer to make sales and marketing decisions; and
Our Direct Marketing Lists, which benefit from our DUNSRight Quality Process to enable our customers to create an accurate and comprehensive marketing campaign.
Our Internet Solutions business provides highly organized, efficient and easy-to-use products that address the online business intelligence needs of professionals and small businesses, including information on companies, industries and executives, integration tools that bring this information into the day-to-day workflow of our customers, and research and advice regarding starting up and managing a business.
Internet Solutions represent the results of our Hoover's business, including both the First Research division and the AllBusiness.com division. Internet Solutions accounted for 7% of our total revenue for the each of the years ended December 31, 2009, 2008 and 2007. See Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations of this Annual Report on Form 10-K for a discussion on trends in this customer solutions set.
Growth to our Internet Solutions business depends upon the development of improved and new products targeted to our primary customer segments, as well as the development of Internet products targeted to the needs of customer segments outside our core audience.
Hoover's provides information on public and private companies, and on industries and executives, sales, marketing and research professionals worldwide. The database includes industry and company briefs, information on competitors, corporate financials, executive contact information, current news and research, family trees, and contact information including biographies. Hoover's subscribers primarily access the data online via Hoover's Online®.
First Research is a leading Internet provider of editorial-based industry insight, specifically tailored toward sales professionals. Through First Research, D&B has been able to enhance its Hoover's solutions with deeper industry-specific content, providing sales professionals with higher quality data and more comprehensive insight.
AllBusiness.com is an online media and e-commerce company that leverages its proprietary publishing platform and a broad range of content to help users run their small businesses. AllBusiness.com operates one of the leading business information sites on the Internet. Its content helps professionals save time and money by addressing real-world business questions with practical solutions.
Our Internet Solutions help customers convert prospects to clients faster by helping them answer questions such as:
How do I identify prospects and better prepare for sales calls?
Who are the key senior-level decision makers?
How does the prospect compare to others in their industry?
Our principal Internet Solutions are:
Our subscription solutions delivered online through Hoover's Online (such as "Researcher," "Prospector," "Relationship Manager," "Executive," and our First Research industry data solution) and via electronic data feeds;
Our advertising and e-marketing solutions provided through www.hoovers.com, www.AllBusiness.com, www.firstresearch.com and related Internet sites; and
Licensing of Hoover's proprietary content to third-party content providers.
Our Sales Force
We rely primarily on our sales force of approximately 2,250 team members worldwide to sell our customers solutions, of which approximately 1,400 were in our North America segment and 850 were in our International segment as of December 31, 2009. Our sales force includes relationship managers and solution specialists who
sell to our strategic and commercial customers, telesales teams, a team that sells to federal, state and local governments, and a team that sells to resellers of our solutions and our data. Our global sales force is also a source of competitive advantage, which allows us to go-to-market across three key customer segments. We identify these segments as strategic customers; commercial customers (or middle market in our International segment); and small businesses.
In 2009, we redesigned the "Go-To-Market" approach for our North America sales organization to increase performance and drive efficiencies. We reorganized the sales force, consolidated channels, reallocated accounts and simplified account teaming structures to get closer to our customers and to improve the efficiency of our sales force. We consolidated sales support functions, realigned around key industries in the strategic customer segment to increase cross-sell opportunities and account penetration, and will leverage telesales to drive new customer acquisition more efficiently. As a result of this reengineering initiative, we reduced the overall size of the North America sales force by approximately 10%.
We believe that different size customers have different needs and require different skill sets to service them. Accordingly, we have adopted a go-to-market sales strategy that focuses on distinct groups categorized internally as large customers, middle market customers and small business customers. Our principal customers within these groups are banks and other credit and financial institutions, manufacturers, wholesalers, retailers, government agencies, insurance companies and telecommunication companies, as well as sales, marketing and business development professionals. None of our customers accounted for more than 10% of our 2009 total revenue or of the revenue of our North American or International segments. Accordingly, neither we nor either of our segments is dependent on a single customer, such that a loss of any one would have a material adverse effect on our consolidated annual results of operations or the annual results of either of our segments.
We are subject to highly competitive conditions in all aspects of our business. However, we believe no competitor offers our complete line of solutions or can match our global data quality resulting from our DUNSRight Quality Process.
In North America, we are a market leader in our Risk Management Solutions business in terms of market share and revenue. We compete with our customers' own internal business practices by continually developing more efficient alternatives to our customers' risk management processes to capture more of their internal spend. We also directly compete with a broad range of companies, including consumer credit companies such as Equifax, Inc. and Experian Information Solutions, Inc. ("Experian"), which have traditionally offered primarily consumer information services, but now offer products that combine consumer information with business information as a tool to help customers make credit decisions with respect to small businesses.
We also compete in North America with a broad range of companies offering solutions similar to our Sales & Marketing Solutions. Our direct competitors in Sales & Marketing Solutions include companies such as Experian and infoGROUP ("infoUSA").
In our Internet Solutions, Hoover's competition varies based on the size of the customer and the level of spending available for services such as Hoover's Online. On the high end of product pricing, Hoover's Researcher, Hoover's Prospector and Hoover's Relationship Manager products compete with other business information providers such as infoUSA. New, less established entrants are also pursuing some of these same customers. On the lower end of product pricing, our Hoover's Exec and Lite solutions mainly competes with advertising-supported Internet sites and other free or low-priced information sources, such as Yahoo! Finance and MarketWatch, Inc.
Outside the U.S., the competitive environment varies by region and country. In Europe, our direct competition is primarily local, such as Experian in the United Kingdom ("UK"). In addition, we compete with certain companies such as Coface for cross border business. However, we believe we offer superior solutions when compared to these networks because of our DUNSRight Quality Process. In addition, the Sales & Marketing Solutions landscape is both localized and fragmented throughout Europe, where numerous local players of varying size compete for business.
In Asia, we face competition in our Risk Management Solutions business from a mix of local and global providers. For example, we compete with Sinotrust in China which is majority owned by Experian, with Teikoku Data Bank ("TDB") in Japan and with Experian in India. In addition, as in Europe, the Sales & Marketing Solutions landscape throughout Asia is localized and fragmented.
We also face significant competition from the in-house operations of the businesses we seek as customers, other general and specialized credit reporting and business information services, and credit insurers. For example, in certain International markets, such as Europe, some credit insurers have identified the provision of credit information as an additional revenue stream. In addition, business information solutions and services are becoming more readily available, principally due to the expansion of the Internet, greater availability of public data and the emergence of new providers of business information solutions and services.
As discussed in "Our Aspiration and Our Strategy" above, we believe that our Trusted Brand, our DUNSRight Quality Process, our Winning Culture and our Financial Flexibility form a powerful competitive advantage.
Our ability to continue to compete effectively will be based on a number of factors, including our ability to:
Communicate and demonstrate to our customers the value of our products and services based upon our proprietary DUNSRight Quality Process and, as a result, improve customer satisfaction;
Maintain and develop proprietary information and services such as analytics (e.g., scoring) and sources of data not publicly available;
Leverage our brand perception and the value of our D&B Worldwide Network;
Maintain those third-party relationships on whom we rely for data and certain operational services; and
Attract and retain a high-performing workforce.
We own and control various intellectual property rights, such as trade secrets, confidential information, trademarks, service marks, trade names, copyrights, patents and applications therefor. These rights, in the aggregate, are of material importance to our business. We also believe that the D&B name and related trade names, marks and logos are of material importance to our business. We are licensed to use certain technology and other intellectual property rights owned and controlled by others, and other companies are licensed to use certain technology and other intellectual property rights owned and controlled by us. We consider our trademarks, service marks, databases, software, patents, patent applications and other intellectual property to be proprietary, and we rely on a combination of statutory (e.g., copyright, trademark, trade secret, patent, etc.) and contract and liability safeguards for protection thereof throughout the world.
Unless the context indicates otherwise, the names of our branded solutions and services referred to in this Annual Report on Form 10-K are trademarks, service marks or registered trademarks or service marks owned by or licensed to us or one or more of our subsidiaries.
We own patents and patent applications both in the U.S. and in other selected countries of importance to us. The patents and patent applications include claims which pertain to certain technologies which we have determined are proprietary and warrant patent protection. We believe that the protection of our innovative
technology, especially technology pertaining to our proprietary DUNSRight Quality Process, through the filing of patent applications is a prudent business strategy, and we will continue to seek to protect those assets for which we have expended substantial capital. Filing of these patent applications may or may not provide us with a dominant position in the fields of technology. However, these patent applications may provide us with legal defenses should subsequent patents in these fields be issued to third parties and later asserted against us. Where appropriate, we may also consider asserting or cross-licensing our patents.
As of December 31, 2009, we employed approximately 5,000 team members worldwide, of which approximately 3,000 were in our North America segment and Corporate and approximately 2,000 were in our International segment. We believe that we have good relations with our employees. There are no unions in the North America segment. Works Councils and Trade Unions represent a portion of our employees in the European and Latin American operations of our International segment.
We are required to file annual, quarterly and current reports, proxy statements and other information with the Securities and Exchange Commission ("SEC"). Investors may read and copy any document that we file, including this Annual Report on Form 10-K, at the SEC's Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. Investors may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains an Internet site at www.sec.gov that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC, from which investors can electronically access our SEC filings.
We make available free of charge on or through our Internet site (www.dnb.com) our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, as soon as reasonably practicable after we electronically file such material with, or furnish the material to, the SEC. The information on our Internet site, on our Hoover's Internet site or on our related Internet sites is not, and shall not be deemed to be, a part of this Annual Report on Form 10-K or incorporated into any other filings we make with the SEC.
Organizational Background of Our Company
As used in this report, except where the context indicates otherwise, the terms "D&B," "Company," "we," "us," or "our" refer to The Dun & Bradstreet Corporation and our subsidiaries.
We were incorporated in 2000 in the State of Delaware. For more information on our history, including the various spin-offs leading to our formation and our becoming a public company in September 2000, see Note 13 in Item 8. of this Annual Report on Form 10-K.
Our business model is dependent upon third parties to provide data and certain operational services, the loss of which would materially impact our business and financial results.
We rely significantly on third parties to support our business model. For example:
We obtain much of the data that we use from third parties, including public record sources;
We utilize single source providers in certain countries that support the needs of our customers around the globe and rely on members of our D&B Worldwide Network to provide local data in countries in which we do not directly operate;
We have also outsourced certain portions of our data acquisition, processing and delivery and customer service processes; and
We have outsourced various functions, such as our technology help desk and network management functions in the U.S. and the UK.
If one or more data providers were to experience financial or operational difficulties or were to withdraw their data, cease making it available, be unable to make it available due to changing industry standards, substantially increase the cost of their data, not adhere to our data quality standards, or be acquired by a competitor who would cause this to occur, our ability to provide solutions and services to our customers could be materially adversely impacted, which could have a material adverse effect on our business and financial results. Similarly, if one of our outsource providers, including third parties with whom we have strategic relationships, were to experience financial or operational difficulties, their services to us would suffer or they may no longer be able to provide services to us at all, having a material adverse effect on our business and financial results. We cannot be certain that we could replace our large third-party vendors in a timely manner or on terms commercially reasonable to us. In addition, if we change a significant outsource provider, an existing provider makes significant changes to the way they conduct their operations, or we seek to bring in-house certain services performed today by third parties, we may experience unexpected disruptions in the provision of our solutions, which could have a material adverse effect on our business and financial results.
Our business performance is dependent upon successful implementation and the ongoing operation of our recently announced two-year Strategic Technology Initiative, the failure of which could materially impact our business and financial results.
In February 2010, we announced an approximately two-year strategic technology initiative to be implemented at an aggregate cost of approximately $110 million to $130 million. We will rely in part on third-party providers to implement a new data supply chain and update our technology infrastructure and to thereafter run such operations both within D&B and from their own remote locations. We have started the detailed planning of this initiative and upon completion we expect that it will:
Simplify and re-architect our data supply chain in order to, among other things, supply intra-day updates;
Create a services layer to optimize access to our data for customers and third parties;
Consolidate our legacy products to provide fewer more impactful applications for customers;
Accelerate revenue growth in our North America segment upon the completion of the initiative; and
Significantly reduce our technology costs upon completion of the initiative.
In the event we fail to successfully develop the plan, and execute on the initiative, including hiring and retaining appropriate technology personnel, engage and manage third parties, re-architect our data supply chain, and simplify our product portfolio while migrating our customers to new products, and maintain such data and technology operations on an ongoing basis, we will not achieve our expected revenue acceleration or growth, or the anticipated cost savings from this initiative, and we could experience a significant competitive disadvantage in the marketplace, which could have a material adverse effect on our business and financial results.
We face competition that may cause price reductions or loss of market share.
We are subject to competitive conditions in all aspects of our business. We compete directly with a broad range of companies offering business information services to customers. We also face competition from:
The in-house operations of the businesses we seek as customers;
Other general and specialized credit reporting and other business information services; and
Credit insurers.
In addition, business information solutions and services are becoming more readily available, principally due to the expansion of the Internet, greater availability of public data and the emergence of new providers of business information solutions and services. Large Internet search engine companies can provide low-cost alternatives to data gathering and change how our customers perform key activities such as marketing campaigns. Such companies, and other third parties which may not be readily apparent today, may become significant low-cost competitors and adversely impact the demand for our solutions and services.
Weak economic conditions also can result in customers seeking to utilize free or lower-cost information that is available from alternative sources such as the Internet and European Commission-sponsored projects like the European Business Register. Intense competition could harm us by causing, among other things, price reductions, reduced gross margins and loss of market share.
We are facing competition outside the U.S., and our competitors could develop an alternative to our D&B Worldwide Network.
We are also facing competition from consumer credit companies that offer consumer information solutions to help their customers make credit decisions regarding small businesses. In addition, consumer information companies are seeking to expand their operations more broadly into aspects of the business information space. While their presence is currently small in the business information market, given the size of the consumer market in which they play, they have scale advantages in terms of scope of operations and size of relationship with customers, which they can potentially leverage to an advantage.
Our ability to continue to compete effectively will be based upon a number of factors, including our ability to:
Maintain and develop proprietary information and services such as analytics (e.g., scoring), and sources of data not publicly available, such as detailed trade data;
Demonstrate value through our decision-making tools and integration capabilities;
Continue to implement the Financial Flexibility component of our strategy and effectively reallocate our spending;
Obtain and deliver reliable and high-quality business information through various media and distribution channels in formats tailored to customer requirements;
Adopt and maintain an effective information technology infrastructure to support product delivery as customer needs and preferences change and competitors offer more sophisticated products;
Attract and retain a high-performance workforce;
Enhance our existing services and introduce new services; and
Improve our International business model and data quality through the successful management in our International segment of the members of our D&B Worldwide Network.
Our business performance might not be sufficient for us to meet the full-year financial guidance that we provide publicly.
We provide full-year financial guidance to the public which is based upon our assumptions regarding our expected financial performance. This includes, for example, assumptions regarding our ability to grow revenue, to grow operating income, to achieve desired tax rates and to generate cash. We believe that our financial
guidance provides investors and analysts with a better understanding of our view of our near-term financial performance. Such financial guidance may not always be accurate, due to our inability to meet the assumptions we make and the impact on our financial performance that could occur as a result of the various risks and uncertainties to our business as set forth in these risk factors and in our public filings with the SEC or otherwise. If we fail to meet the full-year financial guidance that we provide or if we find it necessary to revise such guidance as we conduct our operations throughout the year, the market value of our common stock could be materially adversely affected.
We may lose key business assets or suffer interruptions in product delivery, including loss of data center capacity or the interruption of telecommunications links, the Internet, or power sources which could significantly impede our ability to do business.
Our operations depend on our ability, as well as that of third-party service providers to whom we have outsourced several critical functions, to protect data centers and related technology against damage from hardware failure, fire, power loss, telecommunications failure, impacts of terrorism, breaches in security (such as the actions of computer hackers), natural disasters, or other disasters. The online services we provide are dependent on links to telecommunications providers. In addition, we generate a significant amount of our revenue through telesales centers and Internet sites that we use in the acquisition of new customers, fulfillment of solutions and services and responding to customer inquiries. We may not have sufficient redundant operations or change management processes in connection with our introduction of new online products or services to prevent a loss or failure in all of these areas in a timely manner. Any damage to our data centers, failure of our telecommunications links or inability to access these telesales centers or Internet sites could cause interruptions in operations that adversely affect our ability to meet customers' requirements and materially adversely affect our business and financial results.
A failure in the integrity of our database could harm our brand and result in a loss of sales and an increase in legal claims.
The reliability of our solutions is dependent upon the integrity of the data in our global database. We have in the past been subject to customer and third-party complaints and lawsuits regarding our data, which have occasionally been resolved by the payment of money damages. A failure in the integrity of our database, whether inadvertently or through the actions of a third party, which may be on the rise, could harm us by exposing us to customer or third-party claims or by causing a loss of customer confidence in our solutions. In addition, we must continue to invest in our database to improve and maintain the quality, timeliness and coverage of the data contained therein if we are to maintain our competitive positioning in the marketplace.
Also, we have licensed, and we may license in the future, proprietary rights to third parties. While we attempt to ensure that the quality of our brand is maintained by the third parties to whom we grant non-exclusive licenses and by customers, they may take actions that could materially adversely affect the value of our proprietary rights or our reputation. In addition, it cannot be assured that these licensees and customers will take the same steps we have taken to prevent misappropriation of our data solutions or technologies.
Our brand and reputation are key assets and competitive advantages of our Company and our business may be affected by how we are perceived in the marketplace.
Our brand and its attributes are key assets of the Company. Our ability to attract and retain customers is highly dependent upon the external perceptions of our level of data quality, business practices and overall financial condition. Negative perceptions or publicity regarding these matters could damage our reputation with customers and the public, which could make it difficult for us to attract and maintain customers. Adverse developments with respect to our industry may also, by association, negatively impact our reputation, or result in higher regulatory or legislative scrutiny. Although we monitor developments for areas of potential risk to our reputation and brand, negative perceptions or publicity could have a material adverse effect on our business and financial results.
We rely on annual contract renewals for a substantial part of our revenue, and our quarterly results may be significantly impacted by the timing of these renewals or a shift in product mix that results in a change in the timing of revenue recognition.
We derive a substantial portion of our revenue from annual customer contracts. If we are unable to renew a significant number of these contracts, our revenue and results of operations would be harmed. In addition, our results of operations from period-to-period may vary due to the timing of customer contract renewals. As contracts are renewed, we have, and may continue to experience, a shift in product mix underlying such contracts. This could result in the deferral of increased amounts of revenue into future periods as a larger portion of revenue is recognized over the term of our contracts rather than upfront at contract signing. Although this may cause our financial results from period-to-period to vary substantially, such change in revenue recognition will not change the total revenue recognized over the life of our contracts.
We may be adversely affected by the current economic environment.
As a result of the macro-economic challenges currently affecting the economy of the United States and other parts of the world, our customers or vendors may experience problems with their earnings, cash flow, or both. This may cause our customers to delay, cancel or significantly decrease their purchases from us, and we may experience delays in payment or their inability to pay amounts owed to us. In addition, our vendors may substantially increase their prices without notice. Any such change in the behavior of our customers or vendors may materially adversely affect our earnings and cash flow. If economic conditions in the United States and other key markets deteriorate further or do not show improvement, we may experience material adverse impacts to our business, operating results, and/or access to credit markets.
Changes in the legislative, regulatory and commercial environments in which we operate may adversely impact our ability to collect, manage, aggregate and use data and may impact our financial results.
Certain types of information we gather, compile and publish are subject to regulation by governmental authorities in certain markets in which we operate, particularly in our international markets. In addition, there is increasing awareness and concern among the general public and companies regarding marketing and privacy matters, particularly as they relate to individual privacy interests and the ubiquity of the Internet. These concerns may result in new laws and regulations. In general, compliance with existing laws and regulations has not to date materially impacted our business and financial results. Nonetheless, future laws and regulations with respect to the collection, management and use of information, and adverse publicity or litigation concerning the commercial use of such information could result in limitations being imposed on our operations, increased compliance or litigation expense and/or loss of revenue, which could have a material adverse effect on our business and financial results.
In addition, governmental agencies may seek, from time-to-time, to increase the fees or taxes that we must pay to acquire, use and/or redistribute data that such governmental agencies collect. While we would seek to pass along any such price increases to our customers or provide alternative services, there is no guarantee that we would be able to do so, given competitive pressures or other considerations. In addition, any such price increases or alternative services may result in reduced usage by our customers and/or loss of market share.
We may be unable to adapt successfully to changes in our customers' preferences for our solutions, which could materially adversely affect our revenues.
Our success depends in part on our ability to adapt our solutions to our customers' preferences. Advances in information technology and uncertain or changing economic conditions are changing the way our customers use and purchase business information. As a result, our customers are demanding both lower prices and more features from our solutions, such as decision-making tools like credit scores and electronic delivery formats. If we do not successfully adapt our solutions to our customers' preferences, our business and financial results
would be materially adversely affected. Specifically, for our larger customers, our continued success will be dependent on our ability to satisfy more of their needs by providing solutions beyond data, such as enhanced analytics and assisting with their data integration efforts. For our smaller customers, our success will depend in part on our ability to develop a strong value proposition, including simplifying our solutions and pricing offerings, to enhance our marketing efforts to these customers and to improve our service to them.
To address customer needs for pricing certainty and increased access to our solutions, we provide subscription pricing plans through our Preferred Pricing Agreement and our Preferred Pricing Agreement with DNBi. These subscription pricing plans provide expanded access to our Risk Management Solutions in a way that provides more certainty over related costs to the customer, which, in turn, generally results in customers increasing their spend on our solutions. These plans have been an important driver of our growth from inception in 2005 to date. Our success moving forward is dependent, in part, on the continued penetration of these offerings and the successful rollout of similar programs in various markets around the world. Similarly, our continued success is dependent on customers' acceptance of our DNBi offering.
Acquisitions, joint ventures or similar strategic relationships may disrupt or otherwise have a material adverse effect on our business and financial results.
As part of our strategy, we may seek to acquire other complementary businesses, products and technologies or enter into joint ventures or similar strategic relationships. These transactions are subject to the following risks:
Acquisitions, joint ventures or similar relationships may cause a disruption in our ongoing business, distract our management and make it difficult to maintain our standards, controls and procedures;
We may not be able to integrate successfully the services, content, products and personnel of any such transaction into our operations;
We may not derive the revenue improvements, cost savings and other intended benefits of any such transaction; and
Risks, exposures and liabilities of acquired entities or other third parties with whom we undertake a transaction, that arise from such third parties' activities prior to undertaking a transaction with us.
We have no direct management control over third-party members of the D&B Worldwide Network who conduct business under the D&B brand name in local markets.
The D&B Worldwide Network is comprised of wholly-owned subsidiaries, joint ventures that we either control or hold a minority interest in, and third-party members who conduct business under the D&B brand name in local markets. While third-party member participation in the D&B Worldwide Network is controlled by commercial services agreements and the use of our trademarks is controlled by license agreements, we have no direct management control over these members beyond the terms of the agreements. As a result, actions or inactions taken by these third-party members may have a material impact on our business and financial results. For example, one or more third-party members may:
Provide a product or service that does not adhere to our data quality standards;
Fail to comply with D&B brand and communication standards;
Engage in illegal or unethical business practices;
Elect not to support new or revised products and services or other strategic initiatives; or
Fail to execute other data or distribution contract requirements.
Such actions or inactions may have an impact on customer confidence in the D&B brand globally, which could materially adversely impact our business and financial results.
We may not be able to attract and retain qualified personnel, including members of our sales force and technology team, which could impact the quality of our performance and customer satisfaction.
Our success and financial results also depend on our continuing ability to attract, retain and motivate highly qualified personnel at all levels. This includes members of our sales force on whom we rely for the vast majority of our revenue, and members of our technology team on whom we rely to continually maintain and upgrade all of our technology operations and maintain and develop our products, and to appropriately use the time and resources of such individuals. Competition for these individuals is intense, and we may not be able to retain our key personnel or key members of our sales or technology teams, or attract, assimilate or retain other highly qualified individuals in the future. We have from time-to-time experienced, and we expect to continue to experience, difficulty in hiring and retaining employees, including members of our sales force and technology team, with appropriate qualifications.
Our operations in the International segment are subject to various risks associated with operations in foreign countries, which could materially adversely affect our business and financial results.
Our success depends in part on our various operations outside North America. For the three years ended December 31, 2009, 2008 and 2007, our International segment accounted for 22%, 21% and 19% of total revenue, respectively. Our International business is subject to many challenges, the most significant being:
Our competition is primarily local, and our customers may have greater loyalty to our local competitors who may have a competitive advantage with us because they are not restricted by U.S. laws with which we require our International segment to comply, such as the Foreign Corrupt Practices Act;
Credit insurance is a significant credit risk mitigation tool in certain markets, thus reducing the demand for our Risk Management Solutions; and
In some markets, key data elements are generally available from public-sector sources, thus reducing a customer's need to purchase our data.
Our International strategy includes the leveraging of our D&B Worldwide Network to improve our data quality. We form and manage these strategic alliances to create a competitive advantage for us over the long term; however, these strategic relationships may not be successful or may be subject to ownership change.
The issue of data privacy is an increasingly important area of public policy in various International markets, and we operate in an evolving regulatory environment that could adversely impact aspects of our business or the business of third parties on whom we depend.
Our operating results could also be negatively affected by a variety of other factors affecting our foreign operations, many of which are beyond our control. These factors may include currency fluctuations, economic, political or regulatory conditions, competition from government agencies in a specific country or region, trade protection measures and other regulatory requirements. Additional risks inherent in International business activities generally include, among others:
Longer accounts receivable payment cycles;
The costs and difficulties of managing International operations and strategic alliances, including the D&B Worldwide Network; and
The need to comply with a broader array of regulatory and licensing requirements, the failure of which could result in fines, penalties or business suspensions.
We may be unable to reduce our expense base through our Financial Flexibility, and the related reinvestments from savings from this program may not produce the level of desired revenue growth which would materially adversely affect our business and financial results.
Successful execution of our strategy includes reducing our expense base through our Financial Flexibility initiatives, and reallocating our expense base reductions into initiatives to produce our desired revenue growth. The success of this program may be affected by:
Our ability to continually adapt and improve our organizational design and efficiency to meet the changing needs of our business and our customers;
Our ability to implement all of the actions required under this program within the established time frame;
Our ability to implement actions that require process or technology changes to reduce our expense base;
Entering into or amending agreements with third-party vendors to renegotiate terms beneficial to us;
Managing third-party vendor relationships effectively;
Completing agreements with our local works councils and trade unions related to potential reengineering actions in certain International markets; and
Maintaining quality around key business processes utilizing our reduced and/or outsourced resources.
If we fail to reduce our expense base, or if we do not achieve our desired level of revenue growth from new initiatives, our business and financial results would be materially adversely affected.
We are involved in tax and legal proceedings that could have a material adverse impact on us.
We are involved in tax and legal proceedings, claims and litigations that arise in the ordinary course of business. As discussed in greater detail under "Note 13. Contingencies" in "Notes to Consolidated Financial Statements" in Part II, Item 8. of this Annual Report on Form 10-K, certain of these matters could materially adversely affect our business and financial results.
Item 1B. Unresolved Staff Comments
Item 2. Properties
Our corporate office is located at 103 JFK Parkway, Short Hills, New Jersey 07078, in a 123,000-square-foot property that we lease. This property also serves as the executive offices of our North America segment.
Our other properties are geographically distributed to meet sales and operating requirements worldwide. We generally consider these properties to be both suitable and adequate to meet current operating requirements. As of December 31, 2009, the most important of these other properties include the following sites:
A 178,000 square-foot leased office building in Center Valley, Pennsylvania, which houses various sales, finance, fulfillment and data acquisition personnel;
A 147,000 square-foot office building that we own in Parsippany, New Jersey, housing personnel from our North American sales, marketing and technology groups (approximately one-third of this building is leased to a third party);
A 78,000 square-foot leased office building in Austin, Texas, which houses a majority of our Hoover's employees; and
A 79,060 square-foot leased space in Marlow, England, which houses our United Kingdom business, International technology and certain other International teams.
In addition to the above locations, we also conduct operations in other offices across the globe, most of which are leased.
Information in response to this Item is included in Part II, Item 8. "Note 13. Contingencies" and is incorporated by reference into Part I of this Annual Report on Form 10-K.
No matters were submitted to a vote of security holders in the fourth quarter of fiscal year 2009.
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Our common stock is listed on the New York Stock Exchange and trades under the symbol DNB. We had 2,919 shareholders of record as of December 31, 2009.
The following table summarizes the high and low sales prices for our common stock, as reported in the periods shown:
High Low High Low
$ 81.40 $ 69.80 $ 93.94 $ 81.02
We paid quarterly dividends to our shareholders totaling $71.5 million, $65.6 million and $58.4 million during the years ended December 31, 2009, 2008 and 2007, respectively. On February 4, 2010, our Board of Directors approved the declaration of a $0.35 per share dividend for the first quarter of 2010. This cash dividend is payable March 18, 2010, to shareholders of record at the close of business on March 3, 2010.
Issuer Purchases of Equity Securities
The following table provides information about purchases made by us or on our behalf during the quarter ended December 31, 2009 of shares of equity that are registered pursuant to Section 12 of the Exchange Act:
of Shares
(a)(b) Average
Share Total Number of
Purchased as
part of Publicly
Plans or
Programs(a)(b) Maximum Number
of Currently
Authorized Shares
that May Yet Be
Purchased Under
the Plans or
Programs(a) Approximate
Shares that
May Yet Be
Programs(b)
(Amounts in millions, except per share data)
— $ — — — $ —
November 1 - 30, 2009
0.2 $ 79.30 0.2 — $ —
1.0 $ 81.16 1.0 0.8 $ 177.3
(a) During the three months ended December 31, 2009, we repurchased 0.5 million shares of common stock for $34.7 million under our Board of Directors approved repurchase program to mitigate the dilutive effect of the shares issued under our stock incentive plans and Employee Stock Purchase Plan. This program was announced in August 2006 and expires in August 2010. The maximum amount authorized under the program is 5.0 million shares, of which 4.2 million shares have been repurchased as of December 31, 2009. We anticipate that this program will be completed prior to maturity in August 2010.
(b) During the three months ended December 31, 2009, we repurchased 0.3 million shares of common stock for $24.8 million related to a previously announced $400 million, two-year share repurchase program approved by our Board of Directors in December 2007. This program was completed in December 2009.
In addition, during the three months ended December 31, 2009, we repurchased 0.2 million shares of common stock for $22.7 million related to a previously announced $200 million share repurchase program approved by our Board of Directors in February 2009. We anticipate that this program will be completed by December 2011.
FINANCIAL PERFORMANCE COMPARISON GRAPH*
In accordance with SEC rules, the graph below compares the Company's cumulative total shareholder return against the cumulative total return of the Standard & Poor's 500 Stock Index and a published industry index starting on December 31, 2004. Our past performance may not be indicative of future performance.
As an industry index, the Company chose the S&P 500 Commercial & Professional Services Index, a subset of the S&P 500 Stock Index that includes companies that provide business-to-business services.
COMPARISON OF FIVE YEAR CUMULATIVE TOTAL RETURN
AMONG D&B, S&P 500 STOCK INDEX AND THE S&P 500 COMMERCIAL &
PROFESSIONAL SERVICES INDEX
* Assumes $100 invested on December 31, 2004, and reinvestment of dividends.
For the Years Ended December 31,
Results of Operations:
Operating Revenues
$ 1,687.0 $ 1,726.3 $ 1,599.2 $ 1,474.9 $ 1,380.0
1,222.5 1,256.6 1,173.6 1,081.2 1,015.4
Operating Income(1)
Non-Operating Income (Expense)—Net(2)
(32.0 ) (30.8 ) 0.7 (13.3 ) (9.7 )
Income from Continuing Operations Before Provision for Income Taxes and Equity in Net Income of Affiliates
Provision for Income Taxes(3)
Equity in Net Income (Loss) of Affiliates
— 0.7 5.4 2.0 (1.3 )
Gain on Disposal of Italian Real Estate Business, Net of Tax Impact
— 0.4 — — —
Income from Discontinued Operations, Net of Income Taxes(4)
Less: Net (Income) Loss Attributable to the Noncontrolling Interest
(2.6 ) (2.4 ) 0.9 — —
Net Income Attributable to D&B
$ 319.4 $ 310.6 $ 298.1 $ 240.7 $ 221.2
Basic Earnings Per Share of Common Stock:
Income from Continuing Operations Attributable to D&B Common Shareholders
$ 6.06 $ 5.65 $ 4.99 $ 3.75 $ 3.31
Income from Discontinued Operations Attributable to D&B Common Shareholders
— 0.02 0.09 0.04 (0.02 )
Net Income Attributable to D&B Common Shareholders
Diluted Earnings Per Share of Common Stock:
Weighted Average Number of Shares Outstanding—Basic
Weighted Average Number of Shares Outstanding—Diluted
Amounts Attributable to D&B Common Shareholders
Income from Continuing Operations, Net of Income Taxes
Cash Dividends Paid per Common Share
$ 1.36 $ 1.20 $ 1.00 $ — $ —
Cash Dividends Declared per Common Share
$ 961.8 $ 904.3 $ 724.8 $ 458.9 $ 0.1
Total D&B Shareholders' Equity (Deficit)
$ (745.7 ) $ (856.7 ) $ (440.1 ) $ (399.1 ) $ 77.6
Noncontrolling Interest
$ 11.7 $ 6.1 $ 3.6 $ — $ —
Total Equity (Deficit)
Non-core gain and (charges)(a) included in Operating Income:
Restructuring Charges
$ (23.1 ) $ (31.4 ) $ (25.1 ) $ (25.5 ) $ (30.7 )
Impaired Intangible Assets
$ (3.0 ) $ — $ — $ — $ —
Settlement of International Payroll Tax Matter Related to a Divested Entity
$ — $ — $ (0.8 ) $ — $ —
Charge Related to a Dispute on the Sale of the Company's French Business
$ — $ — $ — $ — $ (0.4 )
(a) See Item 7. included in this Annual Report on Form 10-K for definition of non-core gains and (charges).
Non-core gains and (charges)(a) included in Non-Operating Income (Expense)—Net:
Effect of Legacy Tax Matters
$ 1.0 $ 1.2 $ 1.6 $ — $ —
Gain Associated with Huaxia/D&B China Joint Venture
$ — $ — $ 5.8 $ — $ —
Gain Associated with Beijing D&B HuiCong Market Research Co., Ltd Joint Venture
$ — $ 0.6 $ — $ — $ —
Gain Associated with Tokyo Shoko Research/D&B Japan Joint Venture
$ — $ — $ 13.2 $ — $ —
Net Gain (Loss) on the Sale of Other Investments
Tax Reserve true-up for the Settlement of 2003 tax year, related to the "Amortization and Royalty Expense Deductions" transaction
$ — $ (7.7 ) $ — $ — $ —
Settlement of Legacy Tax Matter Arbitration
$ 4.1 $ 8.1 $ — $ — $ —
Gain on Disposal of Italian Domestic Business
$ 6.5 $ — $ — $ — $ —
Gain on Sale of a 5% Investment in a South African Company
$ — $ — $ — $ — $ 3.5
Lower Costs Related to the Sale of Iberia (Spain and Portugal) Business
Non-core gains and (charges)(a) included in Provision for Income Taxes:
$ 8.4 $ 11.2 $ 9.4 $ 8.6 $ 8.1
$ (1.0 ) $ (1.2 ) $ (1.6 ) $ — $ —
$ (3.1 ) $ (3.1 ) $ — $ — $ —
Benefits Derived From Worldwide Legal Entity Simplification
$ 36.2 $ — $ — $ — $ —
Tax Reserve true-up for the Settlement of 1997-2002 tax years, primarily related to the "Amortization and Royalty Expense Deductions/Royalty Income 1997-2007" transaction
$ — $ 15.4 $ — $ — $ —
Favorable Resolution of Global Tax Audits including the Liquidation of Dormant International Corporations and/or Divested Entities
Interest on IRS Deposit
Impact of Revaluing the Net Deferred Tax Assets in the UK as a Result of a UK Tax Law Change, Enacted in Q3 2007, Which Reduces the General UK Tax Rate From 30% to 28%
Charge/Increase in Tax Legacy Reserve for "Royalty Expense Deductions 1993-1997"
$ — $ — $ — $ (0.8 ) $ —
Tax Benefits Recognized upon the Liquidation of Dormant International Corporations
$ — $ — $ — $ — $ 16.3
Tax Charge Related to the Company's Repatriation of Foreign Cash
Tax Legacy Refund for "Utilization of Capital Losses 1989-1990"
(4) On December 27, 2007, we sold our Italian real estate business for $9.0 million, which was a part of our International segment, and we have reclassified the historical financial results of the Italian real estate business as discontinued operations. We have reflected the results of this business as discontinued operations in the consolidated statements of earnings for all periods presented as set forth in this Annual Report on Form 10-K. We have recorded the resulting gain of $0.4 million (both pre-tax and after-tax) from the sale in the first quarter of 2008 in the consolidated statement of operations.
How We Manage Our Business
For internal management purposes, we refer to "core revenue," which we calculate as total operating revenue less the revenue of divested businesses. Core revenue is used to manage and evaluate the performance of our segments and to allocate resources because this measure provides an indication of the underlying changes in revenue in a single performance measure. Core revenue does not include reported revenue of divested businesses since they are not included in future revenue.
On May 29, 2009, we completed the sale of substantially all the assets and liabilities of the domestic portion of our Italian operations. This sale has been classified as a "Divestiture." Our divested business contributed 1% of our total revenue for the year ended December 31, 2009 and 3% of our total revenue for each of the years ended December 31, 2008 and 2007. See Note 14 and Note 17 to our consolidated financial statements included in Item 8. of this Annual Report on Form 10-K for further detail.
We also isolate the effects of changes in foreign exchange rates on our revenue growth because we believe it is useful for investors to be able to compare revenue from one period to another, both with and without the effects of foreign exchange. As a result, we monitor our core revenue growth both after and before the effects of foreign exchange. Core revenue growth excluding the effects of foreign exchange is referred to as "revenue growth before the effects of foreign exchange."
From time-to-time we have analyzed and we may continue to further analyze core revenue growth before the effects of foreign exchange among two components, "organic core revenue growth" and "core revenue growth from acquisitions." We analyze "organic core revenue growth" and "core revenue growth from acquisitions" because management believes this information provides an important insight into the underlying health of our business. Core revenue includes the revenue from acquired businesses from the date of acquisition.
We evaluate the performance of our business segments based on segment revenue growth before the effects of foreign exchange, and segment operating income growth before certain types of gains and charges that we consider do not reflect our underlying business performance. Specifically, for management reporting purposes, we evaluate business segment performance "before non-core gains and charges" because such charges are not a component of our ongoing income or expenses and/or may have a disproportionate positive or negative impact on the results of our ongoing underlying business operations. A recurring component of non-core gains and charges are our restructuring charges, which result from a foundational element of our growth strategy that we refer to as Financial Flexibility. Through Financial Flexibility, management identifies opportunities to improve the performance of the business in terms of reallocating our spending from low-growth or low-value activities to activities that will create greater value for shareholders through enhanced revenue growth, improved profitability and/or quality improvements. Management is committed through this process to examining how every dollar is spent, and optimizing between variable and fixed costs to ensure flexibility in changes to our operating expense base as we make strategic choices. This enables us to continually and systematically identify improvement opportunities in terms of quality, cost and customer experience. Such charges are variable from period-to-period based upon actions identified and taken during each period. Management reviews operating results before such charges on a monthly basis and establishes internal budgets and forecasts based upon such measures. Management further establishes annual and long-term compensation such as salaries, target cash bonuses and target equity compensation amounts based on such measures and a significant percentage weight is placed upon such measures before such charges in determining whether performance objectives have been achieved. Management believes that by eliminating restructuring charges from such financial measures, and by being overt to shareholders about the results of our operations excluding such charges, business leaders are provided incentives to recommend and execute actions that are in the best long-term interests of our shareholders, rather than being influenced by the potential impact a charge in a particular period could have on their compensation. Additionally, transition costs (period costs such as consulting fees, costs of temporary employees, relocation costs and stay bonuses incurred to implement the Financial Flexibility component of our strategy) are reported as
"Corporate and Other" expenses and are not allocated to our business segments. See Note 14 to our consolidated financial statements included in Item 8. of this Annual Report on Form 10-K for financial information regarding our segments.
Similarly, when we evaluate the performance of our business as a whole, we focus on results (such as operating income, operating income growth, operating margin, net income, tax rate and diluted earnings per share) before non-core gains and charges because such non-core gains and charges are not a component of our ongoing income or expenses and/or may have a disproportionate positive or negative impact on the results of our ongoing underlying business operations and may drive behavior that does not ultimately maximize shareholder value. Additionally, for fiscal years 2009, 2008 and 2007, our non-GAAP (generally accepted accounting principles in the United States of America) measures reflect results on a continuing operations basis. It may be concluded from our presentation of non-core gains and charges that the items that result in non-core gains and charges may occur in the future.
We monitor free cash flow as a measure of our business. We define free cash flow as net cash provided by operating activities minus capital expenditures and additions to computer software and other intangibles. Free cash flow measures our available cash flow for potential debt repayment, acquisitions, stock repurchases, dividend payments and additions to cash, cash equivalents and short-term investments. We believe free cash flow to be relevant and useful to our investors as this measure is used by our management in evaluating the funding available after supporting our ongoing business operations and our portfolio of product investments.
Free cash flow should not be considered as a substitute measure for, or superior to, net cash flows provided by operating activities, investing activities or financing activities. Therefore, we believe it is important to view free cash flow as a complement to our consolidated statements of cash flows.
In addition, we evaluate our North America Risk Management Solutions based on two metrics: (1) "subscription," and "non-subscription," and (2) "DNBi" and "non-DNBi." We define "subscription" as contracts that allow customers' unlimited use within predefined ranges, subject to certain conditions. In these instances, we recognize revenue ratably over the term of the contract, which is generally one year and "non-subscription" as all other revenue streams. We define "DNBi" as our interactive, customizable online application that offers our customers real time access to our most complete and up-to-date global DUNSRight information, comprehensive monitoring and portfolio analysis and "non-DNBi" as all other revenue streams. Management believes these measures provide further insight into our performance and growth of our North America Risk Management Solutions revenue.
The adjustments discussed herein to our results as determined under generally accepted accounting principles in the United States of America ("GAAP") are among the primary indicators management uses as a basis for our planning and forecasting of future periods, to allocate resources, to evaluate business performance and, as noted above, for compensation purposes. However, these financial measures (e.g., results before non-core gains and charges and free cash flow) are not prepared in accordance with GAAP, and should not be considered in isolation or as a substitute for total revenue, operating income, operating income growth, operating margin, net income, tax rate, diluted earnings per share, or net cash provided by operating activities, investing activities and financing activities prepared in accordance with GAAP. In addition, it should be noted that because not all companies calculate these financial measures similarly, or at all, the presentation of these financial measures is not likely to be comparable to measures of other companies.
See "Results of Operations" below for a discussion of our results reported on a GAAP basis.
As of January 1, 2009, Canada has been moved out of our International segment and into our renamed "North America" segment (formerly our United States ("U.S.") segment). Therefore, on January 1, 2009, we
began managing our operations through the following two segments: North America (which consists of the U.S. and Canada) and International (which consists of our operations in Europe, Asia Pacific and Latin America). We have conformed historical amounts to reflect the new segment structure.
The financial statements of our subsidiaries outside of North America reflect a fiscal year ended November 30 to facilitate the timely reporting of our consolidated financial results and financial position.
The following table presents the contribution by segment to core revenue and total revenue:
Core Revenue:
79 % 81 % 83 %
The following table presents the contribution by customer solution set to core revenue and total revenue:
Core Revenue by Customer Solution Set:
7 % 7 % 7 %
Total Revenue by Customer Solution Set(1):
(1) Our divested business contributed 1% of our total revenue for the year ended December 31, 2009 and 3% of our total revenue for each of the years ended December 31, 2008 and 2007.
These customer solution sets are discussed in greater detail in Item 1. "Business" of this Annual Report on Form 10-K.
Within our Risk Management Solutions, we monitor the performance of our "Traditional" products, our "Value-Added" products and our "Supply Management" products. Within our Sales & Marketing Solutions, we monitor the performance of our "Traditional" products and our "Value-Added" products.
Our Traditional Risk Management Solutions include our DNBi Solution and also consist of reports from our database used primarily for making decisions about new credit applications. Our Traditional Risk Management Solutions constituted the following percentages of total Risk Management Solutions Revenue, Total Revenue and Core Revenue:
Risk Management Solutions Revenue
Core Revenue
Our Value-Added Risk Management Solutions generally support automated decision-making and portfolio management through the use of scoring and integrated software solutions. Our Value-Added Risk Management Solutions constituted the following percentages of total Risk Management Solutions Revenue, Total Revenue and Core Revenue:
Our Supply Management Solutions can help companies better understand the financial risk of their supply chain. Our Supply Management Solutions constituted the following percentages of total Risk Management Solutions Revenue, Total Revenue and Core Revenue:
Our Traditional Sales & Marketing Solutions generally consist of marketing lists, labels and customized data files used by our customers in their direct mail and marketing activities. Our Traditional Sales & Marketing Solutions constituted the following percentages of total Sales & Marketing Solutions Revenue, Total Revenue and Core Revenue:
Sales & Marketing Solutions Revenue
Our Value-Added Sales & Marketing Solutions generally include decision-making and customer information management solutions. Our Value-Added Sales & Marketing Solutions constituted the following percentages of total Sales & Marketing Solutions Revenue, Total Revenue and Core Revenue:
Our Critical Accounting Policies and Estimates
In preparing our consolidated financial statements and accounting for the underlying transactions and balances reflected therein, we have applied the significant accounting policies described in Note 1 to our consolidated financial statements included in Item 8. of this Annual Report on Form 10-K. Of those policies, we consider the policies described below to be critical because they are both most important to the portrayal of our financial condition and results, and they require management's subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. We base our estimates on historical experience and on various other factors that we believe to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions.
If actual results in a given period ultimately differ from previous estimates, the actual results could have a material impact on such period.
We have discussed the selection and application of our critical accounting policies and estimates with the Audit Committee of our Board of Directors, and the Audit Committee has reviewed the disclosure regarding critical accounting policies and estimates as well as the other sections in this "Management's Discussion and Analysis of Financial Condition and Results of Operations."
Financial Accounting Standards Board ("FASB") Launches Accounting Standards Codification
In June 2009, the FASB issued FASB Accounting Standards Codification TM ("ASC") 105-10, "Generally Accepted Accounting Principles," or "ASC 105-10" (the "Codification"). This authoritative guidance establishes the exclusive authoritative reference for GAAP for use in financial statements, except for Securities and Exchange Commission ("SEC") rules and interpretative releases, which are also authoritative GAAP for SEC registrants. The Codification supersedes all existing non-SEC accounting and reporting standards. All other grandfathered, non-SEC accounting literature not included in the Codification is nonauthoritative.
Following the Codification, the FASB will not issue new standards in the form of Statements, FASB Staff Positions or Emerging Issues Task Force Abstracts. Instead, it will issue Accounting Standards Updates ("ASU"), which will serve to update the Codification, provide background information about the authoritative guidance and provide the basis for conclusions on the changes to the Codification.
GAAP is not intended to be changed as a result of the Codification, but it has changed the way the authoritative guidance is organized and presented. As a result, these changes made an impact on how we reference GAAP in our financial statements and in our accounting policies. Where appropriate, we have conformed, throughout this Form 10-K, references to both the Codification and/or the previous GAAP source reference.
Pension and Postretirement Benefit Obligations
Through June 30, 2007, we offered to substantially all of our U.S. based employees coverage under a defined benefit plan called The Dun & Bradstreet Corporation Retirement Account ("U.S. Qualified Plan"). The defined benefit plan covered active and retired employees including retired individuals from spin-off companies (see Note 13 to our consolidated financial statements included in Item 8. of this Annual Report on Form 10-K for further discussion of spin-off companies). The benefits to be paid upon retirement are based on a percentage of the employee's annual compensation. The percentage of compensation allocated annually to a retirement account ranged from 3% to 12.5% based on age and service. Amounts allocated under the plan also receive interest credits based on the 30-year Treasury rate or equivalent rate published by the Internal Revenue Service. Pension costs are determined actuarially and funded in accordance with the Internal Revenue Code. We also maintain supplemental and excess plans in the United States ("U.S. Non-Qualified Plans") to provide additional retirement benefits to certain key employees of the Company. These plans are unfunded, pay-as-you-go plans. The U.S. Qualified Plan and the U.S. Non-Qualified Plans account for approximately 70% and 15% of our pension obligation, respectively, at December 31, 2009. Effective June 30, 2007, we amended the U.S. Qualified Plan and one of the U.S. Non-Qualified Plans, known as the U.S. Pension Benefit Equalization Plan (the "PBEP"). Any pension benefit that had been accrued through such date under the two plans was "frozen" at its then current value and no additional benefits, other than interest on such amounts, will accrue under the U.S. Qualified Plan and the PBEP. Our employees in certain of our international operations are also provided retirement benefits through defined benefit plans, representing the remaining balance of our pension obligations.
We also provide various health care and life insurance benefits for retirees. U.S. based employees, who retire with 10 years of vesting service after age 45, are eligible to receive benefits. Postretirement benefit costs
and obligations are determined actuarially. Effective March 1, 2010, we will eliminate company-paid life insurance benefits for retirees. In addition, we will only share the minimum necessary amount of subsidy received from the government in any year to maintain actuarial equivalence for as long as possible.
The key assumptions used in the measurement of the pension and postretirement obligations and net periodic pension and postretirement cost are:
Expected long-term rate of return on pension plan assets—which is based on a target asset allocation as well as expected returns on asset categories of plan investments;
Discount rate—which is used to measure the present value of pension plan obligations and postretirement health care obligations. The discount rates are derived using a yield curve approach which matches projected plan benefit payment streams with bond portfolios, reflecting actual liability duration unique to our plans;
Rates of compensation increase and cash balance accumulation/conversion rates—which are based on an evaluation of internal plans and external market indicators; and
Health care cost trends—which are based on historical cost data, the near-term outlook and an assessment of likely long-term trends.
We believe that the assumptions used are appropriate, though changes in these assumptions would affect our pension and other postretirement benefit costs. The factor with the most immediate impact on our consolidated financial statements is a change in the expected long-term rate of return on pension plan assets for the U.S. Qualified Plan. For 2010, we will continue to use an expected long-term rate of return of 8.25%. This assumption was 8.25% in each of the years 2009, 2008 and 2007. The 8.25% assumption represents our best estimate of the expected long-term future investment performance of the U.S. Qualified Plan, after considering expectations for future capital market returns and the plan's asset allocation. As of December 31, 2009 the U.S. Qualified Plan was 65% invested in publicly traded equity securities, 30% invested in debt securities and 5% invested in real estate investments. Every one-quarter-percentage-point increase or decrease in the long-term rate of return increases or reduces our annual operating income by approximately $3 million by increasing or reducing our net periodic pension income.
Changes in the discount rate, rate of compensation increase and cash balance accumulation/conversion rates also have an effect on our annual operating income. Based on the factors noted above, the discount rate is adjusted at each remeasurement date while other assumptions are reviewed annually. For our U.S. plans, every one-quarter-percentage-point increase or decrease in the discount rate reduces or increases our pension cost by approximately $0.5 million. The discount rate used to determine pension cost for our U.S. pension plans was 6.10%, 6.37% and 5.84% for 2009, 2008 and 2007, respectively. For 2010, we decreased the discount rate to 5.72% from 6.10% for all our U.S. pension plans.
Differences between the assumptions stated above and actual experience could affect our pension and other postretirement benefit costs. When actual plan experience differs from the assumptions used, actuarial gains or losses arise. These gains and losses are aggregated and amortized generally over the average future service periods or life expectancy of plan participants to the extent that such gains or losses exceed a "corridor". The purpose of the corridor is to reduce the volatility caused by the difference between actual experience and the pension-related assumptions noted above, on a plan-by-plan basis. For all of our pension plans, total actuarial losses that have not been recognized in our pension costs as of December 31, 2009 and 2008 were $887.7 million and $855.2 million, respectively, of which $672.2 million and $682.1 million, respectively, were attributable to the U.S. Qualified Plan, $105.0 million and $89.5 million, respectively, were attributable to the U.S. Non-Qualified Plans, and the remainder was attributable to the non-U.S. pension plans. (See discussion in Note 10 to our consolidated financial statements included in Item 8. of this Annual Report on Form 10-K.) We expect to recognize a portion of such losses in our 2010 net periodic pension cost of approximately $12 million, $6 million and $3 million, for the U.S. Qualified Plan, U.S. Non-Qualified Plans and non-U.S. plans, respectively, compared to $15.8 million, $5.7 million and $1.0 million, respectively, in 2009. The lower amortization of
actuarial loss in 2010 for the U.S. Qualified plan, which will be included in our pension cost in 2010, is primarily due to a change, starting in November 2009 (according to our accounting policy), in amortization period from average future service years of active participants to average life expectancy of all plan participants. The decrease is substantially offset by the impact of a larger unrecognized actuarial loss subject to amortization in 2010. Higher amortization of actuarial loss in 2010 for our U.S. Non-Qualified Plans and non-U.S. plans was primarily due to lower discount rates applied to the plan at December 31, 2009, as well as a larger unrecognized actuarial loss subject to amortization in 2010.
Differences between the expected long-term rate of return assumption and actual experience could affect our net periodic pension cost. For our pension plans, we recorded net pension periodic cost of $6.0 million, net pension periodic income of $3.7 million and net pension periodic cost of $10.7 million for the years ended December 31, 2009, 2008 and 2007, respectively. A major component of the net pension periodic cost is the expected return on plan assets, which was $115.2 million, $121.7 million and $117.1 million for the years ended December 31, 2009, 2008 and 2007, respectively. The expected return on plan assets was determined by multiplying the expected long-term rate of return assumption by the market-related value of plan assets. The market-related value of plan assets recognizes asset gains and losses over five years to reduce the effects of short-term market fluctuations on net periodic cost. For our pension plans we recorded: (i) for the year ended December 31, 2009, a total investment gain of $191.5 million which was comprised of a gain of $162.4 million in our U.S. Qualified Plan and a gain of $29.1 million in our non-U.S. plans; (ii) for the year ended December 31, 2008, a total investment loss of $392.2 million which was comprised of a loss of $348.1 million in our U.S. Qualified Plan and a loss of $44.1 million in our non-U.S. plans; and (iii) for the year ended December 31, 2007, a total investment gain of $105.7 million which was comprised of a gain of $91.2 million in our U.S. Qualified Plan and a gain of $14.5 million in our non-U.S. plans. At January 1, 2010, the market-related value of plan assets of our U.S. Qualified Plan and the non-U.S. plans was $1,267.7 million and $180.2 million, respectively, compared with the fair value of its plan assets of $1,045.0 million and $169.2 million, respectively.
Changes in the funded status of our pension plans could result in fluctuation in our shareholders' equity (deficit). We are required to recognize the funded status of our benefit plans as a liability or an asset, on a plan-by-plan basis with an offsetting adjustment to Accumulated Other Comprehensive Income ("AOCI"), in our shareholders' equity (deficit), net of tax. Accordingly, the amounts recognized in equity represent unrecognized gains/losses and prior service costs. These unrecognized gains/losses and prior service costs will be amortized out of equity (deficit) based on an actuarial calculation each period. Gains/losses and prior service costs that arise during the year are recognized as a component of Other Comprehensive Income ("OCI") which is then reflected in AOCI. We recorded a net loss of $10.4 million and net loss of $291.1 million in OCI, net of applicable tax, in the years ended December 31, 2009 and 2008, respectively, related to the actuarial gain/loss and prior service cost arising during the period and the amortization of such items. The decreased loss in 2009 was primarily due to the improvement of the funded status for our U.S. Qualified Plan from a deficit of $155.5 million at December 31, 2008 compared to a deficit of $121.5 million at December 31, 2009, driven by better asset performance in 2009 compared to a significant asset loss in 2008. The positive impact from better asset performance was partially mitigated by a lower discount rate at December 31, 2009.
For information on pension and postretirement benefit plan contribution requirements, please see "Future Liquidity—Sources and Uses of Funds—Pension Plan and Postretirement Benefit Plan Contribution Requirements." See Note 10 to our consolidated financial statements included in Item 8. of this Annual Report on Form 10-K for more information regarding costs of, and assumptions for, our pension and postretirement benefit obligations and costs.
Contingencies and Litigation
We establish reserves in connection with legal proceedings, claims and litigation when it is probable that a loss has been incurred and the amount of loss is reasonably estimable. Contingent liabilities are often resolved over long periods of time. Estimating probable losses requires analyses of multiple forecasts that often depend on judgments concerning potential actions by third parties and regulators. In connection with tax proceedings, we
utilize a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. This is an inherently subjective and complex process, and actual results may differ from our estimates by material amounts. See Note 13 to our consolidated financial statements included in Item 8. of this Annual Report on Form 10-K.
Revenue is recognized when the following four conditions are met:
Persuasive evidence of an arrangement exists;
The contract fee is fixed and determinable;
Delivery or performance has occurred; and
Collectibility is reasonably assured.
If at the outset of an arrangement, we determine that collectibility is not reasonably assured, revenue is deferred until the earlier of when collectibility becomes probable or the receipt of payment. If there is uncertainty as to the customer's acceptance of our deliverables, revenue is not recognized until the earlier of receipt of customer acceptance or expiration of the acceptance period. If at the outset of an arrangement, we determine that the arrangement fee is not fixed or determinable, revenue is deferred until the arrangement fee becomes estimable, assuming all other revenue recognition criteria have been met.
Our Risk Management Solutions are generally sold under fixed price subscription contracts that allow customers unlimited access to risk information. Revenue on this type of contract is recognized ratably over the term of the contract, which is generally one year.
Risk information is also sold using monthly or annual contracts that allow customers to purchase our risk information up to the contract amount based on an agreed price list. Once the contract amount is fully used, additional risk information can be purchased at per-item prices which may be different than those in the original contract. Revenue on these contracts is recognized on a per-item basis as information is purchased and delivered to the customer. If customers do not use the full amount of their contract and forfeit the unused portion, we recognize the forfeited amount as revenue at contract expiration.
Where a data file of risk information is sold with periodic updates to that information, a portion of the revenue related to the updates is deferred as a liability on the balance sheet and recognized as the updates are delivered, usually on a quarterly or monthly basis over the term of the contract.
Revenue related to services, such as monitoring, is recognized ratably over the period of performance.
Sales & Marketing Solutions that provide continuous access to our marketing information and business reference databases may include access or hosting fees which are sold on a subscription basis. Revenue is recognized ratably over the term of the contract, which is typically one year.
Where a data file of marketing information is sold, we recognize revenue upon delivery of the marketing data file to the customer. If the contract provides for periodic updates to that marketing data file, the portion of the revenue related to updates is deferred as a liability on the balance sheet and recognized as the updates are delivered, usually on a quarterly or monthly basis, over the term of the contract.
Internet Solutions represent the results of our Hoover's business, including both the First Research division and the AllBusiness.com division. Hoover's and First Research provide subscription solutions that allow continuous access to our business information databases. Revenue is recognized ratably over the term of the contract, which is generally one year. Any additional solutions purchased are recognized upon delivery to the customer. AllBusiness.com provides online media and e-commerce products that provide advertisers the ability to target small business customers. Revenue is recognized as solutions are delivered to the customer over the contract period.
Sales of software that are considered to be more than incidental are recognized in revenue when a non-cancelable license agreement has been signed and the software has been shipped and installed, if required.
Revenue from consulting and training services is recognized as the services are performed.
We have certain solution offerings that are sold as multi-element arrangements. The multiple elements or deliverables may include access to our business information databases, information data files, updates, software and services. To account for each deliverable as a separate unit of accounting, they each must meet all of the following separation criteria:
The delivered item(s) has value to the customer on a stand-alone basis;
There is objective and reliable evidence of fair value of the undelivered item(s); and
If the arrangement includes a general right of return relative to the undelivered item(s), delivery or performance of the undelivered item(s) is considered probable and substantially in the control of the company.
If the deliverable or a group of deliverables meets the separation criteria, the total arrangement consideration is allocated to each unit of accounting based on its relative fair value. The amount of arrangement consideration that is allocated to a delivered unit of accounting is limited to the amount that is not contingent upon the delivery of another unit of accounting.
We obtain vendor specific objective evidence ("VSOE") of the fair value of a deliverable by monitoring the price at which we sell the deliverable on a standalone basis. Where we are unable to use VSOE, we may use the price at which we or a third party sell a similar product to similarly situated customers on a standalone basis. If we do not have fair value for the delivered items, the contract fee is allocated to the undelivered items based on their fair values and the remaining residual amount, if any, is allocated to the delivered items.
After the arrangement consideration is allocated to each unit of accounting, we apply the appropriate revenue recognition method from those described above for each unit of accounting, assuming all other revenue recognition criteria are met. All deliverables that do not meet the separation criteria are combined with an undelivered unit of accounting. We generally recognize revenue for a combined unit of accounting based on the method most appropriate for the last delivered item.
Deferred revenue consists of amounts billed in excess of revenue recognized on sales of our information solutions and generally relates to deferral of subscription revenue. Deferred revenue is included in current liabilities in the balance sheet and is subsequently recognized as revenue in accordance with our revenue recognition policies.
We record revenue on a net basis for those sales where we act as an agent or broker in the transaction.
See Note 2 to our consolidated financial statements included in Item 8. of this Annual Report on Form 10-K for disclosure of the impact that recently issued accounting standards may have on our audited consolidated financial statements.
The following discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements. They should be read in conjunction with the consolidated financial statements and related footnotes set forth in Item 8. of this Annual Report on Form 10-K, which have been prepared in accordance with GAAP.
Consolidated Revenue
The following table presents our revenue by segment:
(Amounts in millions)
$ 1,309.7 $ 1,364.2 $ 1,291.3
1,665.1 1,678.6 1,552.1
Divested Business
The following table presents our revenue by customer solution set:
$ 1,071.8 $ 1,070.4 $ 991.4
Year ended December 31, 2009 vs. Year ended December 31, 2008
Total revenue decreased $39.3 million, or 2% (1% decrease before the effect of foreign exchange), for the year ended December 31, 2009 as compared to the year ended December 31, 2008. The decrease in total revenue was primarily driven by a decrease in total North America revenue of $54.5 million, or 4% (both before and after the effect of foreign exchange) partially offset by an increase in total International revenue of $15.2 million, or 4% (14% increase before the effect of foreign exchange). Our divestiture of the domestic portion of our Italian operations in the second quarter of 2009 accounted for $21.9 million and $47.7 million for the years ended December 31, 2009 and 2008, respectively.
Core revenue, which reflects total revenue less revenue from a divested business, decreased $13.5 million, or 1% (1% increase before the effect of foreign exchange), for the year ended December 31, 2009, as compared to the year ended December 31, 2008. The decrease in core revenue is primarily attributed to:
Lower purchases from our customers due to a weak economy and budgetary pressures. We are working with our customers to reduce the scope of various projects to meet their budget constraints which has slightly improved our retention rates; and
The negative impact of foreign exchange;
partially offset by:
Increased revenue as a result of a) our consolidation of our majority owned joint ventures in: i) Dun & Bradstreet Information Services India Private Limited ("D&B India") completed in the fourth quarter of 2008; ii) HC International, Inc. in China completed in the fourth quarter of 2008; and iii) RoadWay International Limited ("RoadWay") in China completed in the third quarter of 2009; b) our acquisition of substantially all of the assets of Bisnode's UK operations and a 100% equity interest in Bisnode's
Irish operations ("ICC") completed in the third quarter of 2009; and c) our acquisition of Quality Education Data ("QED") completed in the first quarter of 2009, which in the aggregate, all of the previously mentioned contributed three points of the growth;
Growth in each of our subscription plans from existing customers, including the customers who previously purchased value-added solutions. These subscription plans provide our customers with unlimited use of our Risk Management reports and data; and
Increased revenue from our Asia Pacific market, primarily from our majority owned Tokyo Shoko Research/D&B Japan Joint Venture.
Customer Solution Set
On a customer solution set basis, the $13.5 million decrease in core revenue reflects:
A $1.4 million, or less than 1% increase in Risk Management Solutions (2% increase before the effect of foreign exchange). The increase was driven by an increase in International of $17.8 million, or 7% (18% increase before the effect of foreign exchange), partially offset by a decrease in North America of $16.4 million, or 2% (both before and after the effect of foreign exchange);
An $8.7 million, or 2% decrease (both before and after the effect of foreign exchange), in Sales & Marketing Solutions. The decrease was driven by a decrease in North America of $32.8 million, or 8% (both before and after the effect of foreign exchange), partially offset by an increase in International of $24.1 million, or 37% (42% increase before the effect of foreign exchange); and
A $6.2 million, or 5%, decrease in Internet Solutions (4% decrease before the effect of foreign exchange). The decrease was driven by a decrease in North America of $5.3 million, or 4% (both before and after the effect of foreign exchange) and a decrease in International of $0.9 million, or 20% (3% decrease before the effect of foreign exchange).
Total revenue increased $127.1 million, or 8% (7% increase before the effect of foreign exchange), for the year ended December 31, 2008 as compared to the year ended December 31, 2007. The increase in total revenue was primarily driven by an increase in total North America revenue of $72.9 million, or 6% (both before and after the effect of foreign exchange) and an increase in total International revenue of $54.2 million, or 18% (14% increase before the effect of foreign exchange). Our divestiture of the domestic portion of our Italian operations in the second quarter of 2009 accounted for $47.7 million and $47.1 million for the years ended December 31, 2008 and 2007, respectively.
Core revenue, which reflects total revenue less revenue from a divested business, increased $126.5 million, or 8% (both before and after the effect of foreign exchange), for the year ended December 31, 2008, as compared to the year ended December 31, 2007. The increase in core revenue is primarily attributed to:
Growth in our subscription plans, due to growth of customers renewing from a subscription plan as well as that associated with conversion from our legacy products to subscription plans from existing customers. These subscription plans provide our customers with unlimited use of our Risk Management reports and data; and
Increased revenue as a result of our acquisitions and our majority owned Tokyo Shoko Research/D&B Japan Joint Venture;
Lower purchases of our legacy products.
On a customer solution set basis, the $126.5 million increase in core revenue reflects:
A $79.0 million, or 8%, increase in Risk Management Solutions (7% increase before the effect of foreign exchange). The increase was driven by an increase in North America of $34.6 million, or 4% (both before and after the effect of foreign exchange), and an increase in International of $44.4 million, or 22% (19% increase before the effect of foreign exchange);
A $30.1 million, or 7% increase (both before and after foreign exchange), in Sales & Marketing Solutions. The increase was driven by an increase in North America of $20.1 million, or 5% (both before and after foreign exchange), and an increase in International of $10.0 million, or 19% (17% increase before the effect of foreign exchange); and
A $17.4 million, or 16% (both before and after the effect of foreign exchange), increase in Internet Solutions. The increase was driven by an increase in North America of $18.2 million, or 18% (both before and after the effect of foreign exchange), partially offset by a decrease in International of $0.8 million, or 15% (13% decrease before the effect of foreign exchange).
Consolidated Operating Costs
The following table presents our consolidated operating costs and operating income:
$ 500.3 $ 480.7 $ 430.4
Selling and Administrative Expenses
Restructuring Charge
As described above in the section "Management's Discussion and Analysis of Financial Condition and Results of Operations—How We Manage Our Business," when we evaluate the performance of our business as a whole, we focus on our operating income (and, therefore, operating costs) before non-core gains and charges, because we do not view these items as reflecting our underlying business operations. We have identified under the caption "Non-Core Gains and (Charges)" below, such non-core gains and charges that are included in our GAAP results.
Operating expenses increased by $19.6 million, or 4%, for the year ended December 31, 2009 as compared to December 31, 2008. The increase was primarily due to the following:
Increased data acquisition costs and fulfillment costs primarily associated with a) our consolidation of our majority owned joint ventures in: i) D&B India completed in the fourth quarter of 2008; ii) HC International, Inc. in China completed in the fourth quarter of 2009; and iii) RoadWay in China completed in the third quarter of 2009; b) our acquisition of ICC completed in the third quarter of 2009; and c) our majority owned Tokyo Shoko Research/D&B Japan Joint Venture; and
Increased costs associated with our strategic investments;
The positive impact of foreign exchange; and
Lower costs as a result of our reengineering efforts and decreased variable expenses (e.g., professional fees and travel related expenses).
Operating expenses increased by $50.3 million, or 12%, for the year ended December 31, 2008 as compared to December 31, 2007. The increase was primarily due to the following:
Costs associated with investments in connection with our strategy, such as DNBi, our interactive, web-based subscription service, and investments to improve customer satisfaction levels;
Increased costs associated with our acquisitions and our majority owned Tokyo Shoko Research/D&B Japan Joint Venture;
The impact of foreign exchange; and
Increased technology costs arising from obligations under our D&B Worldwide Network agreements;
Lower costs as a result of our reengineering efforts.
Selling and administrative expenses decreased $45.0 million, or 7%, for the year ended December 31, 2009 as compared to December 31, 2008. The decrease was primarily due to the following:
Lower costs as a result of our reengineering efforts (e.g., our "Go-To-Market" approach for our North America sales organization) and decreased variable expenses (e.g., commissions and bonuses, professional fees, and travel related expenses); and
The positive impact of foreign exchange;
Increased selling expenses primarily associated with a) our consolidation of our majority owned joint ventures in: i) D&B India completed in the fourth quarter of 2008; ii) HC International, Inc. in China completed in the fourth quarter of 2008; and iii) RoadWay in China completed in the third quarter of 2009; b) our acquisition of ICC completed in the third quarter of 2009; c) our acquisition of QED completed in the first quarter 2009; and d) our majority owned Tokyo Shoko Research/D&B Japan Joint Venture.
Selling and administrative expenses increased $14.5 million, or 2%, for the year ended December 31, 2008 as compared to December 31, 2007. The increase was primarily due to the following:
Increased selling expenses primarily related to investments to enhance our strategic capabilities, such as with our acquisitions and our majority owned Tokyo Shoko Research/D&B Japan Joint Venture; and
The impact of foreign exchange;
Matters Impacting Both Operating Expenses and Selling and Administrative Expenses
Pension, Postretirement and 401(k) Plan
For our pension plans globally, we had a net pension periodic cost of $6.0 million, net pension periodic income of $3.7 million and net pension periodic cost of $10.7 million for the years ended December 31, 2009, 2008 and 2007, respectively. The fluctuation in the pension cost/income was due to the following:
The discount rates applied to the pension plans were major factors in driving the pension costs to fluctuate from year to year. The higher the discount rate, the lower the pension cost. The discount rate used to measure the pension costs for our U.S. plans for the years ended December 31, 2009, 2008 and 2007 was 6.10%, 6.37% and 5.84% , respectively.
Actuarial loss amortization included in annual pension expense was also a major factor in driving the pension costs to fluctuate from year-to-year. Actuarial loss amortization was largely impacted by the discount rate and plan experience. The higher the discount rate, the lower the loss amortization. Actuarial loss amortization included in annual pension expense for all global plans was $22.5 million, $16.2 million and $23.5 million for the years ended December 31, 2009, 2008 and 2007, respectively, of which $21.5 million, $14.1 million and $19.7 million were attributable to our U.S. plans for the years ended December 31, 2009, 2008 and 2007, respectively.
Higher pension income in 2008 was primarily due to the higher discount rate applied to our U.S. plans and the major International plans, as well as lower actuarial loss amortization included in 2008.
We expect that the net pension cost in 2010 will be approximately $6 million for all of our global pension plans. Lower discount rates and higher actuarial losses subject to amortization will increase our 2010 pension cost. The discount rates applied to our U.S. plans and major International plan at January 1, 2010, are 38 basis points and 102 basis points lower than 2009, respectively. This increase in 2010 pension cost is substantially offset by the impact of a longer amortization period applied to our U.S. Qualified Plan. Starting in November 2009, the amortization period applied to the unrecognized actuarial gains or losses for our U.S. Qualified Plan has been changed from average future service years of active participants to average life expectancy of all plan participants. The change was the result of almost all the plan participants being deemed inactive.
We had postretirement benefit income of $1.3 million, $4.2 million and $3.5 million for the years ended December 31, 2009, 2008 and 2007, respectively. Lower postretirement benefit income in 2009 was primarily due to full amortization of the prior service credit. This prior service credit was related to the 2003 plan amendment to limit our insurance premium contribution. Higher postretirement benefit income in 2008 was primarily due to higher amortization of actuarial gain, which was driven by positive plan experience and changes in assumptions.
We expect postretirement benefit income will be approximately $3 million in 2010. The increase in income from 2009 to 2010 is primarily due to higher amortization of prior service credit, resulting from a plan amendment which will be effective March 1, 2010, that eliminates the company-paid life insurance benefits for retirees. In addition, we will only share the minimum necessary amount of subsidy received from the government in any year to maintain actuarial equivalence for as long as possible.
We had expense associated with our 401(k) Plan of $6.9 million, $19.2 million and $12.0 million for the years ended December 31, 2009, 2008 and 2007, respectively. The decrease in expense in 2009 was due to the amendment of our employer matching provision in the 401(k) Plan effective in February, 2009, to decrease our match formula from 100% to 50% of a team member's contributions and to decrease the maximum match from seven percent (7%) to three percent (3%) of such team member's eligible compensation, subject to certain 401(k) Plan limitations. The increase in expense in 2008 from 2007 was due to the amendment of our matching policy in the 401(k) Plan effective July 1, 2007, to increase our match formula from 50% to 100% of a team member's contributions and to increase the maximum match to seven percent (7%) from six percent (6%), of such team member's eligible compensation, subject to certain 401(k) Plan limitations.
Effective in April 2010, we will increase the employer maximum match from three percent (3%) to seven percent (7%) of a team member's eligible compensation, subject to certain 401(k) Plan limitations and we will continue to match 50% of a team member's contributions.
We consider net pension cost and postretirement benefit income to be part of our compensation costs, and, therefore, they are included in operating expenses and in selling and administrative expenses, based upon the classifications of the underlying compensation costs. See the discussion of "Our Critical Accounting Policies and Estimates—Pension and Postretirement Benefit Obligations," above, and Note 10 to our consolidated financial statements included in Item 8. of this Annual Report on Form 10-K.
For the years ended December 31, 2009, 2008 and 2007, we recognized total stock-based compensation expense of $22.3 million, $27.6 million and $25.9 million, respectively.
For the years ended December 31, 2009, 2008 and 2007, we recognized expense associated with our stock option programs of $9.5 million, $11.0 million and $11.9 million, respectively. The decreases for the years ended December 31, 2009 and 2008, were primarily driven by a decrease in the overall number of employees eligible for stock options.
For the years ended December 31, 2009, 2008 and 2007, we recognized expense associated with our restricted stock, restricted stock units and restricted stock opportunity programs of $11.9 million, $15.6 million and $13.1 million, respectively. The decrease for the year ended December 31, 2009 as compared to December 31, 2008, was primarily driven by performance-based awards being below target, resulting in lower expense. The increase for the year ended December 31, 2008 as compared to December 31, 2007, was primarily due to the addition of the 2008 annual grant and special grants awarded in the fourth quarter of 2007.
For the years ended December 31, 2009, 2008 and 2007, we recognized expense associated with our Employee Stock Purchase Plan ("ESPP") of $0.9 million, $1.0 million and $0.9 million, respectively.
We consider these costs to be part of our compensation costs and, therefore, they are included in operating expenses and in selling and administrative expenses, based upon the classifications of the underlying compensation costs.
Depreciation and amortization decreased $0.4 million, or 1%, for the year ended December 31, 2009 as compared to December 31, 2008. The decrease for the year ended December 31, 2009 was primarily driven by a reassessment of the useful lives of our computer software in conjunction with changes in our technology strategy. We review the estimated remaining useful lives of our computer software and may extend the useful life when events and circumstances indicate the computer software can operate beyond its original or current useful life. Prior to the second quarter of 2009, the useful life of computer software assets was typically three to five years. We now expect the useful life of our back-end and back-office software to be in the range of five to eight years, and we have extended the useful lives accordingly. This reassessment included a review of the major components of our strategy and consideration of the effects of obsolescence, technology, competition and other economic factors on the useful life of these assets. The impact of this change was effective in the second quarter of 2009, and the impact for the year ended December 31, 2009 was a reduction in software amortization expense by approximately $7 million after-tax ($0.14 per diluted share).
The decrease was partially offset by an increase in amortization of acquired intangible assets resulting from our acquisitions and our majority owned joint ventures and increased capital costs for revenue generating investments to enhance our strategic capabilities.
Depreciation and amortization increased $11.9 million, or 26%, for the year ended December 31, 2008 as compared to December 31, 2007. This increase was primarily driven by the increased capital costs for revenue generating investments to enhance our strategic capabilities (e.g., DNBi) and the amortization of acquired intangible assets resulting from our acquisitions and our majority owned joint ventures.
Restructuring charges have been recorded in accordance with ASC 712-10, "Nonretirement Postemployment Benefits," or "ASC 712-10," and/or ASC 420-10, "Exit or Disposal Cost Obligations," or "ASC 420-10," as appropriate.
We record severance costs provided under an ongoing benefit arrangement once they are both probable and estimable in accordance with the provisions of ASC 712-10.
We account for one-time termination benefits, contract terminations, asset write-offs, and/or costs to terminate lease obligations less assumed sublease income in accordance with ASC 420-10, which addresses financial accounting and reporting for costs associated with restructuring activities. Under ASC 420-10, we establish a liability for a cost associated with an exit or disposal activity, including severance and lease termination obligations, and other related costs, when the liability is incurred, rather than at the date that we commit to an exit plan. We reassess the expected cost to complete the exit or disposal activities at the end of each reporting period and adjust our remaining estimated liabilities, if necessary.
The determination of when we accrue for severance costs and which standard applies depends on whether the termination benefits are provided under an ongoing arrangement as described in ASC 712-10 or under a one-time benefit arrangement as defined by ASC 420-10. Inherent in the estimation of the costs related to the restructurings are assessments related to the most likely expected outcome of the significant actions to accomplish the exit activities. In determining the charges related to the restructurings, we had to make estimates related to the expenses associated with the restructurings. These estimates may vary significantly from actual costs depending, in part, upon factors that may be beyond our control. We will continue to review the status of our restructuring obligations on a quarterly basis and, if appropriate, record changes to these obligations in current operations based on management's most current estimates.
During the year ended December 31, 2009, we recorded a $23.1 million restructuring charge in connection with Financial Flexibility initiatives. The significant components of these charges included:
Severance and termination costs of $12.7 million in accordance with the provisions of ASC 712-10 were recorded. Approximately 535 employees are impacted. Of these 535 employees, approximately 365 employees have exited the Company and approximately 170 employees will exit the Company in 2010; and
Lease termination obligations, other costs to consolidate or close facilities and other exit costs of $10.4 million.
Severance and termination costs of $27.5 million in accordance with the provisions of ASC 712-10 were recorded. Approximately 500 employees were impacted; and
Severance and termination costs of $3.0 million in accordance with the provisions of ASC 420-10 were recorded. Approximately 40 employees were impacted.
Lease termination obligations, other costs to consolidate or close facilities and other exit costs of $2.4 million.
Interest Income (Expense)—Net
The following table presents our "Interest Income (Expense)—Net":
$ 3.0 $ 11.5 $ 7.3
(45.7 ) (47.4 ) (28.3 )
$ (42.7 ) $ (35.9 ) $ (21.0 )
Interest income decreased $8.5 million, or 74%, for the year ended December 31, 2009 as compared to December 31, 2008, primarily attributable to lower interest rates, as well as lower amounts of invested cash. Interest income increased $4.2 million, or 57%, for the year ended December 31, 2008 as compared to December 31, 2007, primarily due to higher interest-bearing investments partially offset by lower interest rates.
Interest expense decreased by $1.7 million, or 4%, for the year ended December 31, 2009 as compared to December 31, 2008, primarily attributable to lower interest rates partially offset by higher amounts of average debt outstanding. Interest expense increased by $19.1 million, or 68%, for the year ended December 31, 2008 as compared to December 31, 2007, primarily attributable to higher amounts of debt outstanding, partially offset by lower interest rates.
Other Income (Expense)—Net
The following table presents the components of "Other Income (Expense)—Net":
For the Years Ended
Settlement of Legacy Tax Matter Arbitration(a)
$ 4.1 $ 8.1 $ —
Gain on Disposal of Italian Domestic Business(b)
6.5 — —
Legacy Tax Matter Related to the Settlement of 2003 Tax Year(c)
— (7.7 ) —
Gain Associated with Beijing D&B HuiCong Market Research Co., Ltd Joint Venture(d)
— 0.6 —
Gain Associated with Huaxia/D&B China Joint Venture(e)
— — 5.8
Gain Associated with Tokyo Shoko Research/D&B Japan Joint Venture(f)
— — 13.2
Gain on Sale of Investment(g)
Miscellaneous Other Income (Expense)—Net(h)
$ 10.7 $ 5.1 $ 21.7
(a) During the years ended December 31, 2009 and 2008, we recognized gains on the receipt of awards related to Legacy Tax Matters.
(b) During the year ended December 31, 2009, we recognized a gain as a result of the divestiture of the domestic portion of our Italian operations. See Note 17 to our consolidated financial statements included in Item 8. of this Annual Report on Form 10-K.
(c) During the year ended December 31, 2008, we recognized the reduction of a contractual receipt under the Tax Allocation Agreement between Moody's Corporation and D&B as it relates to the expiration of the statute of limitations.
(d) During the year ended December 31, 2008, we entered into an agreement with HC International Inc. and established two joint venture companies including Beijing D&B HuiCong Market Research Co., Ltd. and Beijing HuiCong Market Research Co. Ltd., in which D&B has a 60% and 30% ownership interest, respectively. We recognized a gain of $0.6 million related to the minority owner's share of the difference between the fair value of our contributed business and its carrying amount.
(e) During the year ended December 31, 2007, we entered into an agreement with Huaxia International Credit Consulting Co. Limited and established our majority owned joint venture to do business as Huaxia/D&B China. We recognized a gain of $5.8 million related to the minority owner's share of the difference between the fair value of our contributed business and its carrying amount.
(f) During the year ended December 31, 2007, we entered into an agreement with Tokyo Shoko Research and established our majority owned joint venture or "Tokyo Shoko Research/D&B Japan Joint Venture" to do business as Dun & Bradstreet TSR Ltd. We recognized a gain of $13.2 million related to the minority owner's share of the difference between the fair value of our contributed business and its carrying amount.
(g) During the year ended December 31, 2007, we recorded a gain related to the sale of an investment in Australia.
(h) Miscellaneous Other Income (Expense)—Net decreased for the year ended December 31, 2009, compared to the year ended December 31, 2008, primarily due to the negative impact of foreign exchange. Miscellaneous Other Income (Expense)—Net increased for the year ended December 31, 2008, compared to the year ended December 31, 2007, primarily due to the positive impact of foreign exchange.
Effective Tax Rate for the Year Ended December 31, 2007
Impact of Tax Reserves for Uncertain Tax Positions
Impact of Tax Incurred in Connection with Huaxia/D&B China Joint Venture and Tokyo Shoko Research/D&B Japan Joint Venture
(2.5 )%
Impact of Liquidation of Dormant International Entities
Impact of Benefits Derived From Worldwide Legal Entity Simplification
Impact of Settlement of Global Tax Audits
On December 27, 2007, we sold our Italian real estate business for $9.0 million, which was a part of our International segment, and we have reclassified the historical financial results of the Italian real estate business as discontinued operations. We have reflected the results of this business as discontinued operations in the consolidated statements of earnings for all periods presented as set forth in this Annual Report on Form 10-K. We have recorded the resulting gain of $0.4 million (both pre-tax and after-tax) from the sale in the first quarter of 2008 in the consolidated statement of operations.
Effective January 1, 2009, we updated our policy to reflect the authoritative guidance in ASC 260-10, which clarifies that instruments granted in share-based payment transactions (e.g., stock-based awards) are participating securities prior to vesting and, therefore, need to be included in the earnings allocation in computing Earnings Per Share ("EPS") under the two-class method. The two-class method requires earnings to be allocated between common shareholders and holders of participating securities. All outstanding unvested share-based payment awards that contain non-forfeitable rights to dividends are considered to be a separate class of common stock and should be included in the calculation of basic and diluted EPS. The EPS calculation is applied retrospectively to all prior-period EPS data presented. The impact of the adoption resulted in a four-cent and two-cent decrease to our basic and diluted EPS for each of the years ended December 31, 2008 and 2007, respectively. Based on a review of our stock-based awards, we have determined that only our restricted stock awards are deemed participating securities. The weighted average restricted shares outstanding was 0.4 million shares for each of the years ended December 31, 2009, 2008 and 2007.
The following table sets forth our EPS:
For Years Ended December 31,
$ 6.06 $ 5.65 $ 4.99
— 0.02 0.09
For the year ended December 31, 2009, basic EPS attributable to D&B common shareholders increased 7% compared with the year ended December 31, 2008, primarily due to a 3% increase in net income due to a lower effective tax rate, the benefit derived from the divestiture of the domestic portion of our Italian operations and a 4% reduction in the weighted average number of basic shares outstanding resulting from our total share repurchases. For the year ended December 31, 2009, diluted EPS attributable to D&B common shareholders increased 7% compared with the year ended December 31, 2008, primarily due to a 3% increase in net income due to a lower effective tax rate, the benefit derived from the divestiture of the domestic portion of our Italian operations and a 4% reduction in the weighted average number of diluted shares outstanding resulting from our total share repurchases.
For the year ended December 31, 2009, we repurchased 1.9 million shares of common stock for $150.0 million under our Board of Directors approved share repurchase programs. In addition, we repurchased 1.0 million shares of common stock for $75.6 million under our Board of Directors approved share repurchase program to mitigate the dilutive effect of shares issued under our stock incentive plans and ESPP.
For the year ended December 31, 2008, basic EPS attributable to D&B common shareholders increased 12% compared with the year ended December 31, 2007, primarily due to a 4% increase in net income due to increased operating performance, the favorable resolution of global tax audits including the liquidation of dormant International corporations and/or divested entities, settlement of a legacy tax matter arbitration, the release of
reserves in 2008 for uncertain tax positions due to the expiration of a statute of limitations and a 7% reduction in the weighted average number of basic shares outstanding resulting from our total share repurchases. For the year ended December 31, 2008, diluted EPS attributable to D&B common shareholders increased 12% compared with the year ended December 31, 2007, primarily due to a 4% increase in net income due to increased operating performance, the favorable resolution of global tax audits including the liquidation of dormant International corporations and/or divested entities, settlement of a legacy tax matter arbitration, the release of reserves in 2008 for uncertain tax positions due to the expiration of a statute of limitations and a 7% reduction in the weighted average number of diluted shares outstanding resulting from our total share repurchases.
Non-Core Gains and (Charges)
For internal management purposes, we treat certain gains and charges that are included in "Consolidated Operating Costs," "Other Income (Expense)—Net" and "Provision for Income Taxes" as non-core gains and charges. These non-core gains and charges are summarized in the table below. We exclude non-core gains and charges when evaluating our financial performance because we do not consider these items to reflect our underlying business performance.
Non-Core gains and (charges) included in Consolidated Operating Costs:
$ (3.0 ) $ — $ —
$ — $ — $ (0.8 )
Non-Core gains and (charges) included in Other Income (Expense)—Net:
$ 1.0 $ 1.2 $ 1.6
$ — $ — $ 5.8
$ — $ 0.6 $ —
$ — $ — $ 13.2
Tax Reserve true-up for the Settlement of the 2003 tax year, related to the "Amortization and Royalty Expense Deductions" transaction
$ 6.5 $ — $ —
Non-Core gains and (charges) included in Provision for Income Taxes:
Tax Reserve true-up for the Settlement of 1997-2002 tax years, primarily related to the "Amortization of Royalty Expense/Deductions/Royalty Income 1997-2007" transaction
$ — $ (0.1 ) $ —
$ (1.0 ) $ (1.2 ) $ (1.6 )
$ (3.1 ) $ (3.1 ) $ —
$ — $ 15.4 $ —
$ 36.2 $ — $ —
As of January 1, 2009, Canada has been moved out of our International segment and into our renamed "North America" segment (formerly our U.S. segment). Therefore, on January 1, 2009, we began managing our operations through the following two segments: North America (which consists of the U.S. and Canada) and International (which consists of our operations in Europe, Asia Pacific and Latin America). We have conformed historical amounts to reflect the new segment structure.
Our results are reported under the following two segments: North America and International. The segments reported below are our segments for which separate financial information is available and upon which operating results are evaluated on a timely basis to assess performance and to allocate resources.
North America is our largest segment representing 78%, 79% and 81% of our total revenue for the years ended December 31, 2009, 2008 and 2007, respectively, and 79%, 81% and 83% of our core revenue for the years ended December 31, 2009, 2008 and 2007, respectively.
There were no divestitures within this segment during the years ended December 31, 2009, 2008 and 2007. The following table presents our North America total and core revenue by customer solution set and North America operating income for the years ended December 31, 2009, 2008 and 2007:
North America Total and Core Revenue
North America total and core revenue decreased $54.5 million, or 4% (both before and after the effect of foreign exchange), for the year ended December 31, 2009, as compared to the year ended December 31, 2008.
North America Customer Solution Sets
On a customer solution set basis, the $54.5 million decrease in core revenue for the year ended December 31, 2009, as compared to the year ended December 31, 2008, reflects:
A decrease in Risk Management Solutions of $16.4 million, or 2% (both before and after the effect of foreign exchange).
For the year ended December 31, 2009, Traditional Risk Management Solutions, which accounted for 72% of total North America Risk Management Solutions, decreased 3% (2% decrease before the effect of foreign exchange). The decrease was primarily due to:
Lower purchases of our traditional legacy products due to economic and budgetary pressures;
Higher purchases due to a conversion from our legacy products to subscription plans from existing customers including the customers who previously purchased value-added solutions. These subscription plans provide our customers with unlimited use of our Risk Management reports and data. We continue to see high single digit price lifts when existing customers renew and double digit price lifts when customers convert to DNBi. Also, with more than half of our Risk Management Solutions revenue already on DNBi, we have a smaller base available for conversion.
For the year ended December 31, 2009, Value-Added Risk Management Solutions, which accounted for 21% of total North America Risk Management Solutions, decreased 3% (2% decrease before the effect of foreign exchange). The decrease was primarily due to:
Lower purchases of our legacy VAP's products from our customers due to economic and budgetary pressures;
Higher purchases from existing customers of new modules enabled by our DNBi platform.
For the year ended December 31, 2009, Supply Management Solutions, which accounted for 7% of total North America Risk Management Solutions, increased 9% (both before and after the effect of foreign exchange), on a small base.
A decrease in Sales & Marketing Solutions of $32.8 million, or 8% (both before and after the effect of foreign exchange).
For the year ended December 31, 2009, Traditional Sales & Marketing Solutions, which accounted for 37% of total North America Sales & Marketing Solutions, decreased 12% (both before and after the effect of foreign exchange). The decrease was primarily due to:
Lower purchases of our legacy products from our customers due to a weak economy and budgetary pressures. This is largely driven by a secular trend, as customers shift from direct mail activities to digital marketing to reduce costs;
A shift in timing of early renewals (primarily into 2008);
Increased revenue associated with our acquisition of QED completed in the first quarter of 2009, which contributed five points of the growth.
For the year ended December 31, 2009, Value-Added Sales & Marketing Solutions, which accounted for 63% of total North America Sales & Marketing Solutions, decreased 5% (both before and after the effect of foreign exchange). The decrease was primarily due to:
Lower purchases of our legacy products from our customers due to economic pressures. We continue to have consistent customer retention but the dollar spend per customer has declined; and
Higher purchases from certain of our customers due to our providing more value through bundled offerings.
A decrease in Internet Solutions of $5.3 million, or 4% (both before and after the effect of foreign exchange), as a result of a decline in renewal sales of our subscription plans triggered by a reduction in the budgets of our customers and a decline in advertising revenue partially offset by a benefit from one large customer deal.
The lower demand in 2009 will impact our 2010 financial results, and, as such, revenue will remain weak through the first half of the year. We expect a gradual recovery as 2010 unfolds. For 2010, we expect revenue in North America to be slightly better than 2009. We expect the first quarter revenue decline for North America to be similar to our fourth quarter 2009 and then show a gradual improvement in trends over the course of the year as a result of:
1) Improving upfront customer commitment trends;
2) Greater new customer acquisition due to our new "Go-To-Market" strategy; and
3) The benefit of our product investments we made in 2009.
We expect our Risk Management Solutions revenue results in the first half of 2010 to continue to feel the impact of lower 2009 up-front demand for our subscription products. Specifically, we expect the Risk Management Solutions rate of decline to get slightly worse in the first quarter of 2010 than it was in the fourth quarter of 2009, before gradually improving over the rest of 2010 as our new customer initiatives gain traction.
In addition, since our Internet Solutions business is primarily a subscription business, the results reflect our weak up-front demand in sales earlier in 2009. As a result, we expect these trends to continue to be weak in the first half of 2010, before stabilizing in the second half of 2010.
North America Operating Income
North America operating income for the year ended December 31, 2009 was $482.5 million, compared to $513.3 million for the year ended December 31, 2008, a decrease of $30.8 million, or 6%. The decrease in operating income was primarily attributable to:
A decrease in North America revenue;
Increased costs associated with our strategic investments; and
An increase in expenses primarily associated with the acquisition of QED;
Lower costs as a result of our reengineering efforts and decreased variable expenses (e.g., commissions, bonuses and travel related expenses).
North America total and core revenue increased $72.9 million, or 6% (both before and after the effect of foreign exchange), for the year ended December 31, 2008 as compared to the year ended December 31, 2007. The increase reflects growth in all of our customer solution sets.
On a customer solution set basis, the $72.9 million increase in total and core revenue for the year ended December 31, 2008 as compared to the year ended December 31, 2007, reflects:
An increase in Risk Management Solutions of $34.6 million, or 4% (both before and after the effect of foreign exchange).
For the year ended December 31, 2008, Traditional Risk Management Solutions, which accounted for 73% of total North America Risk Management Solutions, increased 4% (both before and after the effect of foreign exchange). The primary drivers of this growth were:
Growth in our subscription plans, due to growth of customers renewing from a subscription plan as well as our existing customers converting from our legacy products to subscription plans. These subscription plans provide our customers with unlimited use of our Risk Management reports and data;
Lower purchases of our legacy products by our small customers.
For the year ended December 31, 2008, Value-Added Risk Management Solutions, which accounted for 21% of total North America Risk Management Solutions, increased 2% (both before and after the effect of foreign exchange). The primary drivers of this growth were:
Higher purchases from existing customers of new modules enabled by our DNBi platform;
A shift in product mix to our Preferred Pricing Agreement with DNBi subscription plans (as noted above).
For the year ended December 31, 2008, Supply Management Solutions, which accounted for 6% of total North America Risk Management Solutions, increased 11% (both before and after the effect of foreign exchange), on a small base.
An increase in Sales & Marketing Solutions of $20.1 million, or 5% (both before and after the effect of foreign exchange).
For the year ended December 31, 2008, Traditional Sales & Marketing Solutions, which accounted for 39% of total North America Sales & Marketing Solutions, increased 4% (both before and after the effect of foreign exchange). The increase was primarily due to:
Existing customers increasing their annual sales commitment and changing the structure from monthly to upfront annually; and
Shift in timing of renewals (primarily from the first quarter of 2009);
For the year ended December 31, 2008, Value-Added Sales & Marketing Solutions, which accounted for 61% of total North America Sales & Marketing Solutions, increased 6% (both before and after the effect of foreign exchange). The increase was primarily due to:
Increased purchases from existing customers; and
Increased revenue associated with our acquisition of Purisma completed in the fourth quarter of 2007;
A slow down in purchases in the fourth quarter of 2008 as a result of the weakening economy, pressure on customer budgets and our execution in the marketplace.
An increase in Internet Solutions of $18.2 million, or 18% (both before and after the effect of foreign exchange). The increase was due to continued growth in subscription revenue in prior quarters and the AllBusiness.com acquisition completed in the fourth quarter of 2007.
North America operating income for the year ended December 31, 2008 was $513.3 million, compared to $480.8 million for the year ended December 31, 2007, an increase of $32.5 million, or 7%. The increase in operating income was primarily attributed to:
An increase in North America revenue;
Increased costs associated with our acquisitions; and
Increased costs associated with investments to enhance our strategic capabilities.
International represented 22%, 21% and 19% of our total revenue for the years ended December 31, 2009, 2008 and 2007, respectively.
On May 29, 2009, we completed the sale of substantially all the assets and liabilities of the domestic portion of our Italian operations. This sale has been classified as a "Divestiture." See Note 17 to our consolidated financial statements included in Item 8. of this Annual Report on Form 10-K for further detail. Our divested business contributed 1% of our total revenue for the year ended December 31, 2009 and 3% of our total revenue for each of the years ended December 31, 2008 and 2007.
International represented 21%, 19% and 17% of our core revenue for the years ended December 31, 2009, 2008 and 2007, respectively.
The following table presents our International revenue by customer solution set and International operating income for the years ended December 31, 2009, 2008 and 2007.
Additionally, this table reconciles the non-GAAP measure of core revenue to the GAAP measure of total revenue by customer solution set.
International Core Revenue
Divested Businesses
International Total Revenue
$ 81.1 $ 70.9 $ 54.2
International total revenue increased $15.2 million, or 4% (14% increase before the effect of foreign exchange), for the year ended December 31, 2009, as compared to the year ended December 31, 2008, reflecting an increase of $41.0 million, or 13% (23% increase before the effect of foreign exchange) in core revenue. Our divestiture of the domestic portion of our Italian operations in the second quarter of 2009 accounted for $21.9 million and $47.7 million for the years ended December 31, 2009 and 2008, respectively. The increase in core revenue was primarily due to:
Increased revenue as a result of a) our consolidation of our majority owned joint ventures in: i) D&B India completed in the fourth quarter of 2008; ii) HC International, Inc. in China completed in the fourth quarter of 2008; and iii) RoadWay in China completed in the third quarter of 2009; and b) the acquisition of ICC completed in the third quarter of 2009, which in the aggregate, all the previously mentioned contributed fourteen points of the growth;
Increased revenue from our Asia Pacific market primarily from our majority owned Tokyo Shoko Research/D&B Japan Joint Venture;
Increased revenue from a) providing increased cross-border data from our operations to members of our D&B Worldwide Network attributable to fulfillment services and product usage; b) our commercial agreement to provide global data to our Italian customers entered into in connection with our divestiture of the domestic portion of our Italian operations; and c) our focus on investments in data quality; and
Growth in our subscription plans in certain of our European markets for existing customers who are willing to increase the level of business they do with us;
The negative impact of foreign exchange.
International Customer Solution Sets
On a customer solution set basis, the $41.0 million increase in International core revenue for the year ended December 31, 2009, as compared to the year ended December 31, 2008, reflects:
An increase in Risk Management Solutions of $17.8 million, or 7% (18% increase before the effect of foreign exchange).
For the year ended December 31, 2009, Traditional Risk Management Solutions, which accounted for 84% of International Risk Management Solutions, increased 12% (22% increase before the effect of foreign exchange). The increase in Traditional Risk Management solutions was primarily due to:
Increased revenue as a result of a) our consolidation of our majority owned joint venture in D&B India completed in the fourth quarter of 2008; and b) the acquisition of ICC completed in the third quarter of 2009, which in the aggregate, all the previously mentioned contributed nine points of the growth;
Growth in our subscription plans in certain of our European markets for existing customers who are willing to increase the level of business they do with us; and
Increased revenue from a) providing cross-border data from our operations to members of our D&B Worldwide Network attributable to fulfillment services and product usage; and b) our commercial agreement to provide global data to our Italian customers entered into in connection with our divestiture of the domestic portion of our Italian operations;
For the year ended December 31, 2009, Value-Added Risk Management Solutions, which accounted for 15% of International Risk Management Solutions, decreased 12% (1% decrease before the effect of foreign exchange) primarily due to:
The negative impact of foreign exchange; and
Lower purchases in our UK market from our customers due to economic and budgetary pressures;
Increased revenue from members of our D&B Worldwide Network, primarily related to our commercial agreement to provide global data to our Italian customers entered into in connection with our divestiture of the domestic portion of our Italian operations; and
Higher purchases from existing customers in certain of our Asia Pacific markets.
For the year ended December 31, 2009, Supply Management Solutions, which accounted for 1% of International Risk Management Solutions, increased 14% (28% increase before the effect of foreign exchange) on a small base.
An increase in Sales & Marketing Solutions of $24.1 million, or 37% (42% increase before the effect of foreign exchange).
For the year ended December 31, 2009, Traditional Sales & Marketing Solutions, which accounted for 53% of International Sales & Marketing Solutions, increased 62% (84% increase before the effect of foreign exchange). This increase was primarily due to increased revenue as a result of our consolidation of our majority owned joint ventures in: i) D&B India completed in the fourth quarter of 2008; ii) HC International, Inc. in China completed in the fourth quarter of 2008; and iii) RoadWay in China completed in the third quarter of 2009;
For the year ended December 31, 2009, Value-Added Sales & Marketing Solutions, which accounted for 47% of International Sales & Marketing Solutions, increased 17% (14% increase before the effect of foreign exchange). The increase was primarily due to increased revenue from our Asia Pacific market primarily from our majority owned Tokyo Shoko Research/D&B Japan Joint Venture and the positive impact of foreign exchange.
A decrease in Internet Solutions of $0.9 million, or 20% (3% decrease before the effect of foreign exchange), on a small base.
International Operating Income
International operating income for the year ended December 31, 2009 was $81.1 million, compared to $70.9 million for the year ended December 31, 2008, an increase of $10.2 million, or 14%, primarily due to:
An increase in core revenue;
Lower costs as a result of our divestiture of the domestic portion of our Italian operations; and
Lower costs as a result of our reengineering efforts;
Increased data acquisition costs and fulfillment costs primarily associated with a) our consolidation of our majority owned joint ventures in: i) D&B India completed in the fourth quarter of 2008; ii) HC International, Inc. in China completed in the fourth quarter of 2008; and iii) RoadWay in China completed in the third quarter of 2009; b) our acquisition of ICC completed in the third quarter of 2009; c) our Tokyo Shoko Research/D&B Japan Joint Venture; and d) increased costs in certain of our European markets;
Higher variable selling expenses related to a) increased revenue (e.g., commissions, bonus, etc.); b) our consolidation of our majority owned joint ventures in: i) D&B India completed in the fourth quarter of 2008; ii) HC International, Inc. in China completed in the fourth quarter of 2008; iii) RoadWay in China completed in the third quarter of 2009; c) the acquisition of ICC completed in the third quarter of 2009; and d) our Tokyo Shoko Research/D&B Japan Joint Venture;
Increased investments in our UK market to maintain our UK data coverage and quality.
International total revenue increased $54.2 million, or 18% (14% increase before the effect of foreign exchange), for the year ended December 31, 2008, as compared to the year ended December 31, 2007, reflecting an increase of $53.6 million, or 21% (18% increase before the effect of foreign exchange) in core revenue. Our divestiture of the domestic portion of our Italian operations in the second quarter of 2009 accounted for $47.7 million and $47.1 million for the years ended December 31, 2008 and 2007, respectively. The increase in core revenue was primarily due to:
Increased revenue as a result of the establishment of our Tokyo Shoko Research/D&B Japan Joint Venture completed in the fourth quarter of 2007;
Growth in our subscription plans in certain of our International markets for existing customers who are willing to increase the level of business they do with us.
An increase in Risk Management Solutions of $44.4 million, or 22% (19% increase before the effect of foreign exchange).
For the year ended December 31, 2008, Traditional Risk Management Solutions, which accounted for 80% of International Risk Management Solutions, increased 24% (21% increase before the effect of foreign exchange). The increase in Traditional Risk Management Solutions is primarily due to:
Growth in our subscription plans in certain of our International markets for existing customers who are willing to increase the level of business they do with us, including customers who previously purchased value-added solutions on a non-subscription basis; and
Growth from purchases from our D&B Worldwide Network for fulfillment services and product usage.
For the year ended December 31, 2008, Value-Added Risk Management Solutions, which accounted for 18% of International Risk Management Solutions, increased 15% (both before and after the effect of foreign exchange), primarily due to:
Higher project-oriented business in our UK market;
Price increases in our European markets in the second half of the 2008 fiscal year; and
Impact of recognition of deferred revenue from prior quarter sales in our Benelux market;
A shift in product mix to our subscription plans (as noted above).
For the year ended December 31, 2008, Supply Management Solutions, which accounted for 2% of International Risk Management Solutions, decreased 15% (16% decrease before the effect of foreign exchange) on a small base.
Sales & Marketing Solutions increased $10.0 million, or 19% (17% increase before the effect of foreign exchange).
For the year ended December 31, 2008, Traditional Sales & Marketing Solutions, which accounted for 44% of International Sales & Marketing Solutions, decreased 7% (3% decrease before the effect of foreign exchange). This was primarily attributed to lower revenue in certain of our International markets, resulting from an increasingly competitive marketplace and economic pressures.
For the year ended December 31, 2008, Value-Added Sales & Marketing Solutions, which accounted for 56% of International Sales & Marketing Solutions, increased 51% (44% increase before the effect of foreign exchange). The increase was primarily due to:
Price increases in our European markets in the second half of the 2008 fiscal year.
A decrease in Internet Solutions of $0.8 million, or 15% (13% decrease before the effect of foreign exchange), on a small base.
Lower costs as a result of our reengineering efforts; and
Increased data acquisition costs and costs associated with our Tokyo Shoko Research/D&B Japan Joint Venture;
Investment in data purchases, new products, product enhancements and fulfillment services; and
Higher variable selling expenses related to increased revenue (e.g., commissions, bonus, etc.).
We are exposed to the impact of interest rate changes, foreign currency fluctuations and changes in the market value of certain of our investments.
We employ established policies and procedures to manage our exposure to changes in interest rates and foreign currencies. We use foreign exchange forward contracts to hedge short-term foreign currency denominated loans, investments and certain third-party and intercompany transactions. From time-to-time, we use foreign exchange option contracts to reduce our International earnings exposure to adverse changes in foreign exchange rates. In addition, from time-to-time, we use interest rate derivatives to hedge a portion of the interest rate exposure on our outstanding debt or in anticipation of future debt issuance, as discussed under "Interest Rate Risk Management" below.
A discussion of our accounting policies for financial instruments is included in the summary of significant accounting policies in Note 1 to our consolidated financial statements included in Item 8. of this Annual Report on Form 10-K, and further disclosure relating to financial instruments is included in Note 7 to our consolidated financial statements included in Item 8. of this Annual Report on Form 10-K.
In January 2009 and December 2008, we entered into interest rate swap agreements with aggregate notional amounts of $25 million and $75 million, respectively, and designated these swaps as cash flow hedges against variability in cash flows related to our bank revolving credit facility. These transactions were accounted for as cash flow hedges and, as such, changes in fair value of the hedges are recorded in Accumulated Other Comprehensive Income ("AOCI"). At December 31, 2009, the balance of net derivative losses associated with these swaps included in AOCI was approximately $0.8 million.
In January 2008, we entered into interest rate derivative transactions with an aggregate notional amount of $400 million. The objective of these hedges was to mitigate the variability of future cash flows from market changes in Treasury rates in the anticipation of the April 2008 debt issuance. These transactions were accounted for as cash flow hedges and, as such, changes in fair value of the hedges that took place through the date of debt issuance were recorded in AOCI. In connection with the issuance of the senior notes in April 2008 with a face value of $400 million that mature on April 1, 2013, bearing interest at an annual rate of 6.00%, payable semi-annually (the "2013 notes"), these interest rate derivative transactions were executed, resulting in a payment of $8.5 million at the date of termination. The payments are recorded in AOCI, and will be amortized over the life of the 2013 notes.
In February 2006 and September 2005, we entered into interest rate derivative transactions with aggregate notional amounts of $100 million and $200 million, respectively. The objective of these hedges was to mitigate the variability of future cash flows from market changes in Treasury rates in the anticipation of the below referenced debt issuance. These transactions were accounted for as cash flow hedges, and as such, changes in fair value of the hedges that took place through the date of debt issuance were recorded in AOCI. In connection with the issuance of the senior notes (the "2011 notes"), these interest rate derivative transactions were executed, resulting in proceeds of approximately $5.0 million at the date of termination. The proceeds are recorded in AOCI and will be amortized over the life of the 2011 notes.
At December 31, 2006, we had a $300 million bank revolving credit facility available at prevailing short-term interest rates, which we terminated on April 19, 2007, and then entered into a new $500 million, five-year bank revolving credit facility, which expires in April 2012. On January 25, 2008, we exercised a $150 million expansion feature on our $500 million credit facility expanding the total facility to $650 million. Borrowings under the $650 million credit facility are available at prevailing short-term interest rates. At December 31, 2009 and December 31, 2008, we had $259.4 million and $203.4 million of floating-rate debt outstanding under the facility, respectively.
A 100 basis point increase/decrease in the weighted average interest rate on our outstanding variable rate debt at December 31, 2009, would result in an incremental increase/decrease in annual interest expense of approximately $2 million.
Foreign Exchange Risk Management
We have numerous offices in various countries outside North America and conduct operations in various countries through minority equity investments and strategic relationships with local providers. Our International operations generated approximately 22% and 21% of our total revenue for the years ended December 31, 2009 and 2008, respectively. Approximately 38% and 34% of our assets as of December 31, 2009 and 2008, respectively, were located outside of North America.
Our objective in managing exposure to foreign currency fluctuations is to reduce the volatility caused by foreign exchange rate changes on the earnings, cash flows and financial position of our International operations. We follow a policy of hedging balance sheet positions denominated in currencies other than the functional currency applicable to each of our various subsidiaries. In addition, we are subject to foreign exchange risk associated with our International earnings and investments.
We use short-term, foreign exchange forward and option contracts to implement our hedging strategies. Typically, these contracts have maturities of twelve months or less. These contracts are denominated primarily in the British pound sterling, the Euro and Canadian dollar. The gains and losses on the forward contracts associated with the balance sheet positions hedge are recorded in "Other Income (Expense)—Net" in our consolidated financial statements and are essentially offset by the gains and losses on the underlying foreign currency transactions.
As in prior years, we have hedged substantially all balance sheet positions denominated in a currency other than the functional currency applicable to each of our various subsidiaries with short-term forward foreign exchange contracts. In addition, from time-to-time, we use foreign exchange option contracts to hedge certain foreign earnings and foreign exchange forward contracts to hedge certain net investment positions. The underlying transactions and the corresponding forward exchange and option contracts are marked-to-market at the end of each quarter and are reflected within our consolidated financial statements.
At December 31, 2009 and 2008, we did not have any option contracts outstanding. At December 31, 2009 and 2008, we had a notional amount of approximately $271.0 million and $254.5 million, respectively, of foreign exchange forward contracts outstanding that offset foreign currency denominated loans. Realized gains and losses associated with these contracts were $24.9 million and $13.6 million, respectively, at December 31, 2009; $16.2 million and $41.8 million, respectively, at December 31, 2008; and $0.4 million and $0.4 million, respectively, at December 31, 2007. Unrealized gains and losses associated with these contracts were $0.6 million and $0.2 million, respectively, at December 31, 2009; $0.4 million and $2.8 million, respectively, at December 31, 2008; and $0.4 million and $0.1 million, respectively, at December 31, 2007.
If exchange rates were to increase on average 10% from year-end levels, without the benefit of having hedging activities, the unrealized loss would be approximately $10 million. If exchange rates on average were to decrease 10% from year-end levels, without the benefit of having hedging activities, the unrealized gain would be approximately $8 million. However, the estimated potential gain and loss on these contracts is expected to be substantially offset by changes in the dollar value of the underlying transactions.
Liquidity and Financial Position
In connection with our focus on delivering Total Shareholder Return, we will remain disciplined in the use of our shareholders' cash, maintaining three key priorities for the use of this cash:
First, making ongoing investments in the business to drive growth;
Second, investing in acquisitions that we believe will be value-accretive to enhance our capabilities and accelerate our growth; and
Third, continuing to return cash to shareholders.
We believe that cash provided by operating activities, supplemented as needed with available financing arrangements, is sufficient to meet our short-term needs (twelve months or less), including restructuring charges, transition costs, contractual obligations and contingencies (see Note 13 to our consolidated financial statements included in Item 8. of this Annual Report on Form 10-K), excluding the legal matters identified in such note for which exposures cannot be estimated or are not probable. In addition, we believe that our ability to readily access the bank and capital markets for incremental financing needs will enable us to meet our continued focus on Total Shareholder Return. We have the ability to access the short-term borrowings market from time-to-time to fund working capital needs, acquisitions and share repurchases. Such borrowings would be supported by our credit facility, when needed.
The unprecedented disruption in the economic environment has had a significant adverse impact on a number of commercial and financial institutions. At this point in time our liquidity has not been impacted by the credit environment and management does not expect that it will be materially impacted in the near-future. Management continues to closely monitor our liquidity, the credit markets and our financial counterparties. However, management cannot predict with any certainty the impact to us of any further disruption in the credit environment.
The following discussions are on a continuing operations basis and therefore exclude the results of the Italian real estate business. See Note 17 to our consolidated financial statements included in Item 8. of this Annual Report on Form 10-K.
Cash Provided by Operating Activities from Continuing Operations
Net cash provided by operating activities was $369.5 million, $433.9 million and $384.6 million for the years ended December 31, 2009, 2008 and 2007, respectively.
Net cash provided by operating activities decreased by $64.4 million for the year ended December 31, 2009 compared to the year ended December 31, 2008. This decrease was primarily driven by:
Timing of payments of accounts payable and accrued liabilities (e.g., investments, data purchases, etc.);
An increase in net tax payments;
An increase in restructuring payments associated with our Financial Flexibility initiatives; and
Lower collections;
Increased net income of our underlying business excluding the impact of non-cash gains and losses.
Net cash provided by operating activities increased by $49.3 million for the year ended December 31, 2008 compared to the year ended December 31, 2007. This increase was primarily driven by:
Increased net income of our underlying business excluding the impact of non-cash gains and losses;
A decrease in restructuring payments associated with our Financial Flexibility initiatives; and
Increased collections;
An increase in both tax payments and interest expense payments.
Cash (Used in) Provided by Investing Activities from Continuing Operations
Net cash used in investing activities was $120.7 million, $154.5 million and $216.4 million for the years ended December 31, 2009, 2008 and 2007, respectively.
Net cash used in investing activities was $120.7 million for the year ended December 31, 2009, as compared to cash used in investing activities of $154.5 million for the year ended December 31, 2008. The $33.8 million decrease primarily reflects the following activities:
Cash settlements of our foreign currency contracts for our hedged transactions resulted in cash inflows of $11.3 million for the year ended December 31, 2009 as compared to cash outflows of $25.6 million for the year ended December 31, 2008;
A net increase in additions to computer software and other intangibles and capital expenditures, which was primarily used to fund software development, product and platform enhancements across all three of our solution sets. Capital expenditures were approximately 4% of revenue in 2009 and we expect them to be approximately 5% of revenue in 2010; and
During the year ended December 31, 2009, in connection with our initiatives to drive long-term growth, we spent $74.6 million on acquisitions/majority-owned joint ventures and other investments, net of cash acquired, as compared to $69.2 million, net of cash acquired, during the year ended December 31, 2008. See Note 4 to our consolidated financial statements included in Item 8. of this Annual Report on Form 10-K for further information.
During the year ended December 31, 2008, in connection with our initiatives to drive long-term growth, we spent $69.2 million on acquisitions/majority-owned joint ventures and other investments, net of cash acquired, as compared to $146.5 million, net of cash acquired, during the year ended December 31, 2007. See Note 4 to our consolidated financial statements included in Item 8. of this Annual Report on Form 10-K for further information;
A decrease in capital expenditures and additions to computer software and other intangibles, which was primarily used to fund software development, product and platform enhancements across all three of our solution sets. The decrease of $12.6 million for the year ended December 31, 2008 as compared to December 31, 2007 was primarily driven by a longer software product development cycle in 2008 versus 2007. The decrease in capital expenditures is related to approximately $6.1 million of furniture and equipment primarily related to our Center Valley, Pennsylvania facility, which was included in accounts payable on the consolidated balance sheet as of December 31, 2006, and was paid for in the year ended December 31, 2007; and
During the year ended December 31, 2008, we received approximately $9.0 million in cash from the sale of our Italian real estate business on December 27, 2007;
Cash settlements of our foreign currency contracts for our hedged transactions resulted in cash outflows of $25.6 million for the year ended December 31, 2008 as compared to cash outflows of $0.3 million for the year ended December 31, 2007.
Cash Used in Financing Activities from Continuing Operations
Net cash used in financing activities was $213.1 million, $242.5 million and $143.0 million for the years ended December 31, 2009, 2008 and 2007, respectively. As set forth below for all these years, these changes primarily relate to contractual obligations, share repurchases and dividends.
In April 2008, we issued notes with a face value of $400 million that mature on April 1, 2013, bearing interest at a fixed annual rate of 6.00%, payable semi-annually. The proceeds from this issuance were used to repay indebtedness under our credit facility.
On January 30, 2008, we entered into interest rate derivative transactions with an aggregate notional amount of $400 million. The objective of these hedges was to mitigate the variability of future cash flows from market changes in Treasury rates in anticipation of the issuance of the 2013 notes. These transactions were accounted for as cash flow hedges and, as such, changes in fair value of the hedges that took place through the date of the issuance of the 2013 notes were recorded in AOCI. In connection with the issuance of the 2013 notes, these interest rate derivative transactions were executed, resulting in a payment of $8.5 million at the date of termination. The payments are recorded in AOCI, and are being amortized over the life of the 2013 notes.
Credit Facility
At December 31, 2007, we had a $500 million, five-year bank revolving credit facility, which expires in April 2012. Borrowings under the $500 million credit facility are available at prevailing short-term interest rates. On January 25, 2008, we exercised a $150 million expansion feature on our $500 million credit facility expanding the total facility to $650 million. We had $259.4 million and $203.4 million of borrowings outstanding under the $650 million credit facility at December 31, 2009 and 2008, respectively. At December 31, 2007, we had $425.3 million of borrowings outstanding under the $500 million credit facility. We borrowed under these facilities from time-to-time during the year ended December 31, 2009 to fund our share repurchases, acquisition strategy and working capital needs.
During the year ended December 31, 2009, we repurchased 2.9 million shares of common stock for $225.6 million under our share repurchase programs. The share repurchases are comprised of the following programs:
In February 2009, our Board of Directors approved a $200 million share repurchase program which commenced in December 2009. During the year ended December 31, 2009, we repurchased 0.2 million shares of common stock for $22.7 million under this share repurchase program. We anticipate that this program will be completed by December 2011.
In December 2007, our Board of Directors approved a $400 million, two-year share repurchase program which commenced in February 2008. During the year ended December 31, 2009, we repurchased 1.7 million shares of common stock for $127.3 million under this share repurchase program. This program was completed in December 2009; and
In August 2006, our Board of Directors approved a four-year, five million share repurchase program to mitigate the dilutive effect of the shares issued under our stock incentive plans and ESPP. We repurchased 1.0 million shares of common stock for $75.6 million under this program during the year ended December 31, 2009. This program expires in August 2010. We anticipate that this program will be completed prior to maturity in August 2010.
In December 2007, our Board of Directors approved a $400 million, two-year share repurchase program, which commenced in February 2008. We repurchased 3.2 million shares of common stock for $272.7 million under this share repurchase program during the year ended December 31, 2008;
In May 2007, our Board of Directors approved a $200 million, one-year share repurchase program, which commenced in July 2007. We repurchased 0.3 million shares of common stock for $26.8 million under this repurchase program during the year ended December 31, 2008. This program was completed in February 2008; and
In August 2006, our Board of Directors approved a four-year, five million share repurchase program to mitigate the dilutive effect of the shares issued under our stock incentive plans and ESPP. We repurchased 0.9 million shares of common stock for $82.4 million under this program during the year ended December 31, 2008. This program expires in August 2010.
In May 2007, our Board of Directors approved a $200 million, one-year share repurchase program, which began in July 2007 upon the completion of the then existing $200 million program. We purchased 1.9 million shares of common stock for $173.2 million under the new $200 million program during the year ended December 31, 2007. This program was completed in February 2008;
In August 2006, our Board of Directors approved a $200 million, one-year share repurchase program which began in October 2006. We repurchased 1.4 million shares of common stock for $125.0 million under this program during the year ended December 31, 2007. This program was completed in July 2007; and
In August 2006, our Board of Directors approved a four-year, five million share repurchase program to mitigate the dilutive effect of the shares issued under our stock incentive plans and ESPP. We repurchased 1.2 million shares of common stock for $110.3 million during the year ended December 31, 2007. This program expires in August 2010.
The total amount of dividends paid during the years ended December 31, 2009, 2008 and 2007 was $71.5 million, $65.6 million and $58.4 million, respectively.
Future Liquidity—Sources and Uses of Funds
Contractual Cash Obligations
The following table quantifies, as of December 31, 2009, our contractual obligations that will require the use of cash in the future.
Contractual Obligations(a)
Total 2010 2011 2012 2013 2014 Thereafter All Other
Long-Term Debt(1)
$ 1,064.2 $ 43.5 $ 329.3 $ 284.6 $ 406.2 $ 0.1 $ 0.5 $ —
Operating Leases(2)
$ 128.2 $ 30.6 $ 24.3 $ 20.1 $ 14.2 $ 12.7 $ 26.3 $ —
Obligations to Outsourcers(3)
$ 373.1 $ 121.7 $ 93.0 $ 67.3 $ 51.3 $ 39.8 $ — $ —
Pension and Other Postretirement Benefits Payments/Contributions(4)
$ 891.5 $ 38.4 $ 45.9 $ 34.2 $ 33.2 $ 32.3 $ 707.5 $ —
Spin-off Obligation(5)
$ 21.5 $ 21.5 $ — $ — $ — $ — $ — $ —
Unrecognized Tax Benefits(6)
$ 129.0 $ — $ — $ — $ — $ — $ — $ 129.0
(a) Because their future cash flows are uncertain, noncurrent liabilities are excluded from the table.
(1) Primarily represents our senior notes with a face value of $300 million that mature in March 2011, net of a $0.2 million discount, bearing interest at a fixed annual rate of 5.50%, payable semi-annually, borrowings outstanding under our bank credit facility at short-term interest rates and our senior notes with a face value of $400 million that mature in April 2013, bearing interest at a fixed annual rate of 6.00%, payable semi-annually. Amounts include the interest portion on future obligations. The interest rate on our senior notes is presented using the stated interest rate. Interest expense on our bank credit facility is estimated using the rate in effect as of December 31, 2009.
(2) Most of our operations are conducted from leased facilities, which are under operating leases that expire over the next ten years, with the majority expiring within five years. We also lease certain computer and other equipment under operating leases that expire over the next three and five years, respectively. These computer and other equipment leases are frequently renegotiated or otherwise changed as advancements in computer technology produce opportunities to lower costs and improve performance.
In July 2002, we outsourced certain technology functions to Computer Sciences Corporation ("CSC") under a 10-year agreement, which we had the right to terminate for a fee at any time and under certain other conditions. Under the terms of the agreement, CSC's responsibilities included data center operations, technology help desk and network management functions in the U.S. and UK as well as certain application development and maintenance functions. This agreement was amended in March 2008, which, among other things, increased certain services level agreements that CSC is required to provide under the Technology Services Agreement and added additional security services to be performed by CSC. In August 2009, we
entered into a wind down agreement with CSC and Acxiom Corporation ("Acxiom") which terminated all of the data center operations functions provided by CSC, effective September 2009. In September 2009 we entered into a new agreement with CSC for limited print and fulfillment services that remained with CSC. We incurred costs of $50.6 million, $77.6 million and $80.4 million under this contract for the years ended December 31, 2009, 2008 and 2007, respectively.
In December 2003, we signed a three-year agreement with ICT Group, Inc. ("ICT"), effective January 2004, to outsource certain marketing call center activities, which agreement contains two renewal options for up to a one-year period. The agreement was amended effective September 2007 to be extended through 2011. Under the terms of the agreement, ICT is responsible for performing certain marketing and credit-calling activities previously performed by our own call centers in North America. The obligation under the contract is based upon transmitted call volumes, but shall not be less than $3 million per contract year. We incurred costs of $3.3 million, $3.2 million and $4.5 million under this contract for the years ended December 31, 2009, 2008 and 2007, respectively.
In October 2004, we signed a seven-year outsourcing agreement with International Business Machines ("IBM"). Under the terms of the agreement, we have transitioned certain portions of our data acquisition and delivery and customer service to IBM. We may terminate this agreement for a fee at any time. We incurred costs of $26.2 million, $30.1 million and $30.7 million under this contract for the years ended December 31, 2009, 2008 and 2007, respectively.
In July 2006, we signed a four-year product and technology outsourcing agreement with Acxiom in order to significantly increase the speed, data processing capacity and matching capabilities we provide our global sales and marketing customers. In November 2008, we extended the term of the outsourcing agreement through 2011. In November 2008 we entered into an agreement that will expand our service capabilities, enhance customer experience and accelerate the migration of the remaining existing D&B fulfillment processes to Acxiom.
In May 2009, and as part of our ongoing Financial Flexibility initiatives, we entered into another agreement with Acxiom to provide certain infrastructure management services that were formerly provided by CSC. These services include data center operations, technology help desk and network management functions. The agreement has an initial term ending in October 2014. In addition, after expiration of the initial term, we have the right to extend the agreement under the same terms for up to a maximum period of three years. Payments to Acxiom over the initial five year contract term based on current volumes will aggregate to approximately $285 million. The agreement provides for typical adjustments due to changes in volume, inflation and incremental project work. Payments made for the provision of such services in 2009 did not differ materially from payments that were expected to be made under our prior arrangement with CSC. However, we anticipate savings to be generated over the life of the contract.
In addition, in December 2009 we signed a three-year data maintenance and support agreement with Acxiom. Payments over the contract term will aggregate approximately $5 million. The agreement provides for typical adjustments due to changes in volume, inflation and incremental project work.
We incurred costs of $42.5 million, $7.5 million and $6.6 million under all of these agreements for the years ended December 31, 2009, 2008 and 2007, respectively. Total payments to Acxiom over the remaining terms of the above contracts will aggregate to approximately $290 million.
(4) Represents projected contributions to our non-U.S. defined benefit plans as well as projected benefit payments related to our unfunded plans, including the U.S. Non-Qualified Plans and our postretirement benefit plan. We do not expect to make any contributions to our U.S. Qualified Plan. The expected benefits are estimated based on the same assumptions used to measure our benefit obligation at the end of 2009 and include benefits attributable to estimated future employee service. A closed group approach is used in calculating the projected benefit payments, assuming only the participants who are currently in the valuation population are included in the projection and the projected benefits continue for up to approximately 99 years.
(5) As part of our spin-off from Moody's/The Dun & Bradstreet Corporation ("D&B2") in 2000, Moody's/D&B2 and D&B entered into a Tax Allocation Agreement ("TAA"). Under the TAA, Moody's/D&B2 and D&B agreed that Moody's/D&B2 would be entitled to deduct the compensation expense associated with the exercise of Moody's stock options (including Moody's stock options exercised by D&B employees) and D&B would be entitled to deduct the compensation expense associated with the exercise of D&B stock options (including D&B stock options exercised by employees of Moody's/D&B2). Put simply, the tax deduction would go to the company that granted the stock options, rather than to the employer of the individual exercising the stock options. The TAA provides, however, that if the Internal Revenue Service ("IRS") issues rules, regulations or other authority contrary to the agreed-upon treatment of the compensation expense deductions under the TAA, then the party that becomes entitled under such guidance to take the deduction may be required to reimburse the other party for the tax benefit it has realized, in order to compensate the other party for its loss of such deduction. In 2002 and 2003, the IRS issued rulings that appear to provide that, under the circumstances applicable to Moody's/D&B2 and D&B, the compensation expense deduction belongs to the employer of the option grantee and not to the issuer of the option (e.g., D&B would be entitled to deduct the compensation expense associated with D&B employees exercising Moody's/D&B2 options and Moody's/D&B2 would be entitled to deduct the compensation expense associated with Moody's/D&B2 employees exercising D&B options). We have filed tax returns for 2001 through 2008, and made estimated tax deposits for 2009, consistent with the IRS' rulings. Under the TAA, we may be required to reimburse Moody's/D&B2 for the loss of compensation expense deductions relating to tax years 2003 to 2009 of approximately $21.5 million in the aggregate for such years. In 2005 and 2006, we paid Moody's/D&B2 approximately $30.1 million in the aggregate under the TAA. We have not made any payments to Moody's/D&B2 since the first quarter of 2006. We may also be required to pay additional amounts in the future based upon interpretations by the parties of the TAA and the IRS' rulings.
(6) We have a total amount of unrecognized tax benefits of $136.9 million for the year ending December 31, 2009. Although we do not anticipate payments within the next twelve months for these matters, these could require the aggregate use of cash totaling approximately $129.0 million. As we cannot make reliable estimates regarding the timing of the cash flows by period, we have included unrecognized tax benefits within the "All Other" column in the table above.
Every year we examine our capital structure and review our plans. During 2010, in connection with our focus on Total Shareholder Return ("TSR"), we anticipate continued share repurchases and cash dividends.
We believe that cash provided by operating activities, supplemented as needed with readily available financing arrangements, is sufficient to meet our short-term needs, including the cash cost of restructuring charges, transition costs, contractual obligations and contingencies, excluding the legal matters identified herein for which exposures cannot be estimated. See Note 13 to our consolidated financial statements included in Item 8. of this Annual Report on Form 10-K.
As we execute our long-term TSR strategy, which contemplates strategic acquisitions, we may require or consider additional financing to fund our TSR strategy. We regularly evaluate market conditions, our liquidity profile and various financing alternatives for opportunities to enhance our capital structure. While we feel confident that such financing arrangements are available to us, there can be no guarantee that we will be able to access new sources of liquidity when required.
The unprecedented disruption in the economic environment has had a significant adverse impact on a number of commercial and financial institutions. At this point in time, our liquidity has not been impacted by the credit environment and management does not expect that it will be materially impacted in the near future. Management continues to closely monitor our liquidity, the credit markets and our financial counterparties. However, management cannot predict with any certainty the impact to us of any further disruption in the credit environment.
In order to mitigate the dilutive effect of the shares issued under our stock incentive plans and ESPP, our Board of Directors approved in August 2006, a four-year, five million share repurchase program. During the year ended December 31, 2009, we repurchased 1.0 million shares of common stock for $75.6 million under this program with 0.8 million shares remaining to be repurchased. We anticipate that this program will be completed prior to maturity in August 2010.
In February 2009, our Board of Directors approved a $200 million share repurchase program which commenced in December 2009. During the year ended December 31, 2009, we repurchased 0.2 million shares of common stock for $22.7 million under this share repurchase program with $177.3 million remaining under this program. We anticipate that this program will be completed by December 2011.
On February 4, 2010, our Board of Directors approved the declaration of a dividend of $0.35 per share for the first quarter of 2010. This cash dividend will be payable on March 18, 2010 to shareholders of record at the close of business on March 3, 2010.
Two-Year Strategic Technology Investment Program
On February 4, 2010, we announced an approximately two-year strategic technology investment program aimed at strengthening our leading position in commercial data and improving our current technology platform to meet emerging needs of customers. We anticipate spending approximately $110 million to $130 million over approximately the next two years to complete the program, with approximately $45 million to $55 million of the spend occurring in 2010. Approximately 60% of the spend will be recognized as an increase to expenses and the remainder as capital expenditures.
Potential Payments in Legal Matters
We and our predecessors are involved in certain legal proceedings, claims and litigation arising in the ordinary course of business. These matters are at various stages of resolution, but could ultimately result in significant cash payments as described in Note 13 to our consolidated financial statements included in Item 8. of this Annual Report on Form 10-K. We believe we have adequate reserves recorded in our consolidated financial statements for our share of current exposures in these matters, where applicable, as described therein.
Pension Plan and Postretirement Benefit Plan Contribution Requirements
For financial statement reporting purposes, the funded status of our pension plans, as determined in accordance with GAAP, had a deficit of $121.5 million, $257.0 million and $72.3 million for the U.S. Qualified Plan, the U.S. Non-Qualified Plans and the non-U.S. plans, respectively at December 31, 2009, as compared to deficits of $155.5 million, $235.8 million, and $45.9 million, respectively, at December 31, 2008. The improvement in the funded status of the U.S. Qualified Plan was primarily due to better asset performance in 2009, partially offset by a higher projected benefit obligation at December 31, 2009 which was driven by a lower discount rate. The deterioration in the funded status of the U.S. Non-Qualified Plans and the non-U.S. plans was primarily due to a higher projected benefit obligation at December 31, 2009, mainly driven by lower discount rates and the negative impact from a change in foreign currency exchange rates, partially offset by higher asset gains in 2009. See Note 10 to our consolidated financial statements included in Item 8. of this Annual Report on Form 10-K.
During fiscal 2009, we were not required to make contributions to the U.S. Qualified Plan, the largest of our six plans, under funding regulations associated with the Pension Protection Act of 2006 ("PPA 2006") as the plan was considered "fully funded" for the 2008 plan year. We do not expect to make any contributions to the U.S. Qualified Plan in fiscal 2010 for the 2009 plan year. Final funding requirements for fiscal 2010 were determined based on our January 2010 funding actuarial valuation.
We expect to continue to make cash contributions to our other pension plans during 2010. The expected 2010 contribution is approximately $31 million, compared to $24.4 million in 2009. In addition, we expect to make benefit payments related to our postretirement benefit plan of approximately $7 million during 2010, compared to $8.4 million in 2009. See the Contractual Cash Obligations table above for projected contributions and benefit payments beyond 2009.
Effective March 1, 2010, we will eliminate company-paid life insurance benefits for retirees. In addition, we will only share the minimum necessary amount of subsidy received from the government in any year to maintain actuarial equivalence for as long as possible.
Effective in April 2010, we will increase our employer maximum match from three percent (3%) to seven percent (7%) of a team member's eligible compensation, subject to certain 401(k) Plan limitations and we will continue to match 50% of a team member's contributions. We expect 2010 cash contributions to the 401(k) Plan to be approximately $9 million compared to $6.9 million in 2009. See Note 10 to our consolidated financial statements included in Item 8. of this Annual Report on Form 10-K for changes to our 401(k) Plan.
Off-Balance Sheet Arrangements and Related Party Transactions
We do not have any transactions, obligations or relationships that could be considered off-balance sheet arrangements except for those disclosed in Note 7 to our consolidated financial statements included in Item 8. of this Annual Report on Form 10-K. Additionally, we have not engaged in any significant related-party transactions.
As described in Note 7 to our consolidated financial statements included in Item 8. of this Annual Report on Form 10-K, effective January 1, 2008, we adopted the authoritative guidance for fair value measurements in ASC 820-10, "Fair Value Measurements and Disclosures," which has been applied prospectively beginning January 1, 2008 for all financial assets and liabilities recognized in the consolidated financial statements at fair value. The authoritative guidance defines fair value, establishes a framework for measuring fair value under GAAP and expands fair value measurement disclosures. The guidance also allowed for a one-year delay of the effective date for fair value measurements for all non-financial assets and liabilities, except for those that are recognized or disclosed at fair value in the financial statements on a recurring basis. We delayed the effective date and applied the measurement provisions for all non-financial assets and liabilities that are recognized at fair value in the consolidated financial statements on a non-recurring basis until January 1, 2009. Our non-recurring non-financial assets and liabilities include long-lived assets held and used, goodwill and intangible assets. These assets are recognized at fair value when they are deemed to be impaired. As of December 31, 2009, we did not have any unobservable (Level III) inputs in determining fair value for our assets and liabilities measured at fair value on a recurring basis other than our real estate funds.
We may from time-to-time make written or oral "forward-looking" statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, including statements contained in filings with the Securities and Exchange Commission, in reports to shareholders and in press releases and investor Web casts. These forward-looking statements can be identified by the use of words like "anticipates," "aspirations," "believes," "continues," "estimates," "expects," "goals," "guidance," "intends," "plans," "projects," "strategy," "targets," "commits," "will" and other words of similar meaning. They can also be identified by the fact that they do not relate strictly to historical or current facts.
We cannot guarantee that any forward-looking statement will be realized. Achievement of future results is subject to risks, uncertainties and inaccurate assumptions. Should known or unknown risks or uncertainties materialize, or should underlying assumptions prove inaccurate, actual results could vary materially from those anticipated, estimated or projected. Investors should bear this in mind as they consider forward-looking
statements and whether to invest in, or remain invested in, our securities. In connection with the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995, we are identifying in the following paragraphs important factors that, individually or in the aggregate, could cause actual results to differ materially from those contained in any forward-looking statements made by us; any such statement is qualified by reference to the following cautionary statements.
The following important factors could cause actual results to differ materially from those projected in such forward-looking statements:
We rely significantly on third parties to support critical components of our business model in a continuous and high quality manner, including third-party data providers, strategic third-party members in our D&B Worldwide Network, and third parties with whom we have outsourcing arrangements;
Our ability to implement and successfully maintain our recently announced approximately two-year strategic technology investment program;
Demand for our products is subject to intense competition, changes in customer preferences and economic conditions which impact customer behavior;
Our solutions and brand image are dependent upon the integrity and security of our global database and the continued availability thereof through the internet and by other means, as well as our ability to protect key assets, such as our data centers;
Our ability to maintain the integrity of our brand and reputation, which we believe are key assets and competitive advantages;
Our ability to renew large contracts, the related revenue recognition and the timing thereof, or a shift in product mix, may impact our results of operations from period-to-period;
As a result of the macro-economic challenges currently affecting the global economy, our customers or vendors may experience cash flow problems. This may cause our customers to delay, cancel or significantly decrease their purchases from us and impact their ability to pay amounts owed to us. In addition, our vendors may substantially increase their prices without notice. Such behavior may adversely affect our earnings and cash flow. In addition, if economic conditions in the United States and other key markets deteriorate further or do not show improvement, we may experience material adverse impacts to our business, operating results, and/or access to credit markets;
Our results are subject to the effects of foreign economies, exchange rate fluctuations, legislative or regulatory requirements, such as the adoption of new or changes in accounting policies and practices, including pronouncements by the Financial Accounting Standards Board or other standard setting bodies, and the implementation or modification of fees or taxes that we must pay to acquire, use, and/or redistribute data;
Our ability to introduce new solutions or services in a seamless way and without disruption to existing solutions such as DNBi;
Our ability to acquire and successfully integrate other complementary businesses, products and technologies into our existing business, without significant disruption to our existing business or to our financial results;
The continued adherence by third-party members of our D&B Worldwide Network to our quality standards, our brand and communication standards and to the terms and conditions of our commercial services arrangements;
Our future success requires that we attract and retain qualified personnel, including members of our sales force and technology teams, in regions throughout the world;
The profitability of our International segment depends on our ability to identify and execute on various initiatives, such as the continued implementation of subscription plan pricing and successfully
managing our D&B Worldwide Network, and our ability to identify and contend with various challenges present in foreign markets, such as local competition and the availability of public records at no cost;
Our ability to successfully implement our growth strategy requires that we successfully reduce our expense base through our Financial Flexibility initiatives, and reallocate certain of the expense-base reductions into initiatives that produce desired revenue growth;
We are involved in various tax matters and legal proceedings, the outcomes of which are unknown and uncertain with respect to the impact on our cash flow and profitability;
Our ability to repurchase shares is subject to market conditions, including trading volume in our stock, and our ability to repurchase shares in accordance with applicable securities laws; and
Our projection for free cash flow is dependent upon our ability to generate revenue, our collection processes, customer payment patterns, the timing and volume of stock option exercises and the amount and timing of payments related to the tax and other matters and legal proceedings in which we are involved.
We elaborate on the above list of important factors throughout this document and in our other filings with the SEC, particularly in the discussion of our Risk Factors in Item 1A. of this Annual Report on Form 10-K. It should be understood that it is not possible to predict or identify all risk factors. Consequently, the above list of important factors and the Risk Factors discussed in Item 1A. of this Annual Report on Form 10-K should not be considered to be a complete discussion of all of our potential trends, risks and uncertainties. Except as otherwise required by federal securities laws, we do not undertake any obligation to update any forward-looking statement we may make from time-to-time.
Information in response to this Item is set forth under the caption "Market Risk" in Item 7. of this Annual Report on Form 10-K.
Index to Financial Statements and Schedules
Management's Responsibility for Financial Statements
Management's Report on Internal Control Over Financial Reporting
Report of Independent Registered Public Accounting Firm
Consolidated Financial Statements:
Consolidated Statement of Operations for the years ended December 31, 2009, 2008 and 2007
Consolidated Balance Sheets at December 31, 2009 and 2008
Consolidated Statement of Cash Flows for the years ended December 31, 2009, 2008 and 2007
Consolidated Statement of Shareholders' Equity (Deficit) for the years ended December 31, 2009, 2008 and 2007
Schedules are omitted as they are not required or inapplicable or because the required information is provided in our consolidated financial statements, including the notes to our consolidated financial statements.
Management is responsible for the preparation of the consolidated financial statements and related information appearing in this report. Management believes that the consolidated financial statements fairly reflect the form and substance of transactions and that the consolidated financial statements reasonably present our financial position and results of operations in conformity with generally accepted accounting principles in the United States of America. Management also has included in the consolidated financial statements amounts that are based on estimates and judgments which it believes are reasonable under the circumstances.
An independent registered public accounting firm audits our consolidated financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States) and their report is provided herein.
MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER
Management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934, as amended. Management designed our internal control systems in order to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America. Our internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States, and that receipts and expenditures are being made only in accordance with authorizations of management and directors; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of our assets that could have a material effect on the financial statements.
Management conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on its evaluation, our management concluded that our internal control over financial reporting was effective at the reasonable assurance level as of December 31, 2009.
The effectiveness of our internal control over financial reporting as of December 31, 2009 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report, which is included herein.
To the Shareholders and Board of Directors of The Dun & Bradstreet Corporation:
In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, shareholders' equity (deficit) and cash flows present fairly, in all material respects, the financial position of The Dun & Bradstreet Corporation and its subsidiaries at December 31, 2009 and December 31, 2008, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2009 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2009, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company's management is responsible for these financial statements, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in "Management's Report on Internal Control over Financial Reporting" on page 69. Our responsibility is to express opinions on these financial statements and on the Company's internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
As discussed in Note 5 to the consolidated financial statements, the Company changed the manner in which it accounts for uncertain tax positions in accordance with ASC 740 Income Taxes in 2007.
A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ PricewaterhouseCoopers LLP
Florham Park, New Jersey
2009 2008* 2007*
(Amounts in millions,
except per share data)
Non-Operating Income (Expense)—Net
(32.0 ) (30.8 ) 0.7
Equity in Net Income of Affiliates
— 0.7 5.4
(2.6 ) (2.4 ) 0.9
Income from Continuing Operations Attributable to D&B
Common Shareholders
Income from Discontinued Operations Attributable to D&B
Weighted Average Number of
Shares Outstanding—Basic
Shares Outstanding—Diluted
Cash Dividend Paid Per Common Share
Comprehensive Income Attributable to D&B
$ 352.4 $ (57.2 ) $ 396.9
* Reflects the adoption of the Financial Accounting Standards Board guidance on noncontrolling interests in consolidated financial statements. See Note 2, "Recent Accounting Pronouncements" for additional information.
The accompanying notes are an integral part of the consolidated financial statements.
$ 222.9 $ 164.2
Accounts Receivable, Net of Allowance of $15.5 at December 31, 2009 and $17.4 at December 31, 2008
Other Receivables
Prepaid Taxes
Deferred Income Tax
Property, Plant and Equipment, Net of Accumulated Depreciation of $80.6 at December 31, 2009 and $80.7 at December 31, 2008
Computer Software, Net of Accumulated Amortization of $347.7 at December 31, 2009 and $303.7 at December 31, 2008
Other Intangibles (Note 15)
Total Non-Current Assets
$ 1,749.4 $ 1,586.0
$ 36.4 $ 63.0
Accrued Payroll
Accrued Income Tax
Other Accrued and Current Liabilities (Note 15)
Pension and Postretirement Benefits
Liabilities for Unrecognized Tax Benefits
D&B SHAREHOLDERS' EQUITY (DEFICIT)
Series A Junior Participating Preferred Stock, $0.01 par value per share, authorized—0.5 shares; outstanding—none
Preferred Stock, $0.01 par value per share, authorized—9.5 shares; outstanding—none
Series Common Stock, $0.01 par value per share, authorized—10.0 shares; outstanding—none
Common Stock, $0.01 par value per share, authorized—200.0 shares; issued—81.9 shares
Capital Surplus
Treasury Stock, at cost, 30.7 shares at December 31, 2009 and 28.6 shares at December 31, 2008
(2,097.7 ) (1,924.4 )
(689.0 ) (722.0 )
Total Liabilities and Shareholders' Equity (Deficit)
Gain from Sale of Discontinued Operations
Net Income from Discontinued Operations
Reconciliation of Net Income to Net Cash Provided by Operating Activities:
Amortization of Unrecognized Pension Loss
Gain from Sales of Businesses
(6.5 ) (1.3 ) (19.9 )
Income Tax Benefit from Stock-Based Awards
Excess Tax Benefit on Stock-Based Awards
(7.7 ) (14.4 ) (26.4 )
Equity-Based Compensation
Restructuring Payments
40.7 28.4 (38.7 )
Accrued Income Taxes, Net
(28.8 ) 13.3 88.4
Changes in Current Assets and Liabilities:
Increase in Accounts Receivable
(Increase) Decrease in Other Current Assets
(0.1 ) 1.1 (4.1 )
Increase in Deferred Revenue
(31.5 ) 35.2 (5.4 )
Net Increase (Decrease) in Accrued Liabilities
3.8 (31.9 ) 16.1
Net (Decrease) Increase in Other Accrued and Current Liabilities
Changes in Non-Current Assets and Liabilities:
Net Increase in Other Long-Term Assets
Net (Decrease) Increase in Long-Term Liabilities
(35.4 ) 1.9 (16.2 )
Net, Other Non-Cash Adjustments
5.6 (3.8 ) (3.2 )
Net Cash Provided by Operating Activities from Continuing Operations
Net Cash Provided by Operating Activities from Discontinued Operations
Proceeds from Sales of Businesses, Net of Cash Divested
Payments for Acquisitions of Businesses, Net of Cash Acquired
(74.6 ) (69.2 ) (146.5 )
Investment in Debt Security
(5.0 ) (10.0 ) —
Cash Settlements of Foreign Currency Contracts
11.3 (25.6 ) (0.3 )
Additions to Computer Software and Other Intangibles
Net, Other
Net Cash (Used in) Provided by Investing Activities from Continuing Operations
(120.7 ) (154.5 ) (216.4 )
Net Cash (Used in) Investing Activities from Discontinued Operations
— (11.7 ) (0.8 )
Payments for Purchases of Treasury Shares
Net Proceeds from Stock-Based Awards
Proceeds from Issuance of Long-Term Debt
— 400.0 —
Payment of Bond Issuance Costs
Payments of Dividends
Proceeds from Borrowings on Credit Facilities
Payments of Borrowings on Credit Facilities
(255.6 ) (1,001.5 ) (484.9 )
Termination of Interest Rate Derivatives
(0.9 ) 0.2 0.4
23.0 (53.3 ) 17.6
Increase in Cash and Cash Equivalents
Cash and Cash Equivalents of Discontinued Operations, End of Period
Cash and Cash Equivalents of Continuing Operations, End of Period
Supplemental Disclosure of Cash Flow Information:
Cash Paid (Received) for:
Income Taxes, Net of Refunds

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