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DNB > SEC Filings for DNB > Form 10-Q on 4-Nov-2011All Recent SEC Filings

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Form 10-Q for DUN & BRADSTREET CORP/NW


4-Nov-2011

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Business Overview

The Dun & Bradstreet Corporation ("D&B" or "we" or "our") is the world's leading source of commercial information and insight on businesses, enabling customers to Decide with Confidence ® for 170 years. Our global commercial database contains more than 200 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.

We provide solution sets that meet a diverse set of customer needs globally. Customers use our D&B Risk Management Solutions™ to mitigate credit and supplier risk, increase cash flow and drive increased profitability; our D&B Sales & Marketing Solutions™ to increase revenue from new and existing customers; and our D&B Internet Solutions ® to convert prospects into clients faster by enabling business professionals to research companies, executives and industries.

As of January 1, 2011, we began reporting our business through three segments:

• North America (which consists of our operations in the United States ("U.S.") and Canada);

• Asia Pacific (which primarily consists of our operations in Australia, Japan, China and India); and

• Europe and Other International Markets (which primarily consists of our operations in the United Kingdom ("UK"), Ireland, Netherlands, Belgium and Latin America).

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 July 30, 2010, we completed the sale of substantially all of the assets and liabilities of our North American Self Awareness Solution business. This business has been classified as a "Divested Business." This divested business contributed 1% and 3% of our North America total revenue for the three month and nine month periods ended September 30, 2010, respectively. See Note 10 and Note 13 to our unaudited consolidated financial statements included in Item 1. of this Quarterly Report on Form 10-Q 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. The change in our revenue growth attributable to foreign currency rates is determined by converting both our prior and current periods by a constant rate. 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 "core 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, charges and intercompany transactions 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


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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 we believe will create greater value for shareholders through enhanced revenue growth, improved profitability and/or quality improvements. Management is committed through this process to examining our spending, 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 non-core gains and 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 performance before non-core gains and charges and a significant percentage weight is placed upon performance before non-core gains and charges in determining whether performance objectives have been achieved. Management believes that by eliminating non-core gains and 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 10 to our unaudited consolidated financial statements included in Item 1. of this Quarterly Report on Form 10-Q 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. 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. 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 solution 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.


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See "Results of Operations" below for a discussion of our results reported on a GAAP basis.

Overview

As of January 1, 2011, we began reporting our business through three segments:

• North America (which consists of our operations in the U.S. and Canada);

• Asia Pacific (which primarily consists of our operations in Australia, Japan, China and India); and

• Europe and Other International Markets (which primarily consists of our operations in the UK, Ireland, Netherlands, Belgium and Latin America).

The financial statements of our subsidiaries outside North America reflect a fiscal quarter ended August 31 to facilitate the timely reporting of our unaudited consolidated financial results and unaudited consolidated financial position.

The following table presents the contribution by segment to total revenue and core revenue:

                                         For the Three Months Ended                 For the Nine Months Ended
                                                September 30,                             September 30,
                                         2011                   2010               2011                   2010
Total Revenue:
North America                                 70 %                   76 %               70 %                   76 %
Asia Pacific                                  15 %                   10 %               15 %                    9 %
Europe and Other International
Markets                                       15 %                   14 %               15 %                   15 %
Core Revenue:
North America                                 70 %                   76 %               70 %                   76 %
Asia Pacific                                  15 %                   10 %               15 %                    9 %
Europe and Other International
Markets                                       15 %                   14 %               15 %                   15 %

The following table presents contributions by customer solution set to total revenue and core revenue:

                                         For the Three Months Ended                 For the Nine Months Ended
                                                September 30,                             September 30,
                                         2011                   2010               2011                   2010
Total Revenue by Customer
Solution Set(1):
Risk Management Solutions                     65 %                   64 %               66 %                   63 %
Sales & Marketing Solutions                   28 %                   28 %               27 %                   27 %
Internet Solutions                             7 %                    7 %                7 %                    7 %
Core Revenue by Customer
Solution Set:
Risk Management Solutions                     65 %                   65 %               66 %                   65 %
Sales & Marketing Solutions                   28 %                   28 %               27 %                   28 %
Internet Solutions                             7 %                    7 %                7 %                    7 %


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(1) Our divested business contributed 1% and 3% of our total consolidated revenue for the three month and nine month periods ended September 30, 2010, respectively. See Note 10 and Note 13 to our unaudited consolidated financial statements included in Item 1. of this Quarterly Report on Form 10-Q for further detail.

Our customer solution sets are discussed in greater detail in "Item 1. Business" in our Annual Report on Form 10-K for the year ended December 31, 2010.

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.


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Risk Management Solutions

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:



                                          For the Three Months Ended                For the Nine Months  Ended
                                                 September 30,                             September 30,
                                          2011                   2010               2011                   2010
Risk Management Solutions Revenue              75 %                   74 %               75 %                   74 %
Total Revenue                                  49 %                   47 %               50 %                   47 %
Core Revenue                                   49 %                   48 %               50 %                   48 %

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:

                                          For the Three Months Ended                For the Nine Months  Ended
                                                 September 30,                             September 30,
                                          2011                   2010               2011                   2010
Risk Management Solutions Revenue              19 %                   19 %               19 %                   20 %
Total Revenue                                  12 %                   13 %               12 %                   12 %
Core Revenue                                   12 %                   13 %               12 %                   13 %

Our Supply Management Solutions can help companies better understand the financial risks of their supply chains. Our Supply Management Solutions constituted the following percentages of total Risk Management Solutions Revenue, Total Revenue and Core Revenue:

                                          For the Three Months Ended                For the Nine Months  Ended
                                                 September 30,                             September 30,
                                         2011                    2010              2011                    2010
Risk Management Solutions Revenue              6 %                     7 %               6 %                     6 %
Total Revenue                                  4 %                     4 %               4 %                     4 %
Core Revenue                                   4 %                     4 %               4 %                     4 %

Sales & Marketing Solutions

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:



                                            For the Three Months Ended                For the Nine Months  Ended
                                                   September 30,                             September 30,
                                            2011                   2010               2011                   2010
Sales & Marketing Solutions Revenue              39 %                   44 %               37 %                   41 %
Total Revenue                                    11 %                   12 %               10 %                   11 %
Core Revenue                                     11 %                   12 %               10 %                   11 %


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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:

                                            For the Three Months Ended                For the Nine Months  Ended
                                                   September 30,                             September 30,
                                            2011                   2010               2011                   2010
Sales & Marketing Solutions Revenue              61 %                   56 %               63 %                   59 %
Total Revenue                                    17 %                   16 %               17 %                   16 %
Core Revenue                                     17 %                   16 %               17 %                   17 %

Critical Accounting Policies and Estimates

In preparing our unaudited consolidated financial statements and accounting for the underlying transactions and balances reflected therein, we have applied the critical accounting policies described in "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the year ended December 31, 2010.

With the exception of the adoption of an accounting pronouncement related to revenue recognition and an update to our goodwill accounting policy, discussed below, there have been no material changes to our significant accounting policies as described in Note 1 to our consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2010.

Revenue Recognition

Effective January 1, 2011, we adopted Accounting Standards Update ("ASU") No. 2009-13, "Revenue Recognition-Multiple-Deliverable Revenue Arrangements," which amends guidance in Accounting Standards Codification ("ASC") 605-25, "Revenue Recognition: Multiple-Element Arrangements," on a prospective basis for all new or materially modified arrangements entered into on or after that date. The new standard:

• Provides updated guidance on whether multiple deliverables exist, how the elements in an arrangement should be separated, and how the consideration should be allocated;

• Requires an entity to allocate revenue in an arrangement using the best estimated selling prices ("BESP") of each element if a vendor does not have vendor-specific objective evidence of selling price ("VSOE") or third-party evidence of selling price ("TPE"); and

• Eliminates the use of the residual method and requires a vendor to allocate revenue using the relative selling price method.

Multiple Element Arrangements

We have certain solution offerings that are sold as multi-element arrangements. The multiple element arrangements or deliverables may include access to our business information database, information data files, periodic data refreshes, software and services. We evaluate each deliverable in an arrangement to determine whether it represents a separate unit of accounting. Most product and service deliverables qualify as separate units of accounting and can be sold standalone or in various combinations across our markets. A deliverable constitutes a separate unit of accounting when it has standalone value and there are no customer-negotiated refunds or return rights for the delivered items. If the arrangement includes a customer-negotiated refund or return right relative to the delivered items, and the delivery and performance of the undelivered item is considered probable and substantially in our control, the delivered item constitutes a separate unit of accounting. The new guidance allows for deliverables with standalone value in a multi-element arrangement for which revenue was previously deferred due to undelivered elements not having fair value of selling price to be separated and recognized as delivered, rather than over the longest service delivery period as a single unit with other elements in the arrangement.


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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 selling price. 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 determine the selling price for each deliverable using VSOE, if it exists, TPE if VSOE does not exist, or BESP if neither VSOE nor TPE exist. Revenue allocated to each element is then recognized when the basic revenue recognition criteria are met for each element.

Consistent with our methodology under the previous accounting guidance, we determine VSOE of a deliverable by monitoring the price at which we sell the deliverable on a standalone basis to third parties or from the stated renewal rate for the elements contained in the initial arrangement. In certain instances, we are not able to establish VSOE for all deliverables in an arrangement with multiple elements. This may be due to us infrequently selling each element separately, not pricing products or services within a set range, or only having a limited sales history. Where we are unable to establish 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. Generally, our offerings contain a level of differentiation such that comparable pricing of solutions with similar functionality or delivery cannot be obtained. Furthermore, we are rarely able to reliably determine what similar competitors' selling prices are on a standalone basis. Therefore, we typically are not able to determine TPE of selling price.

When we are unable to establish selling prices by using VSOE or TPE, we establish the BESP in our allocation of arrangement consideration. The objective of BESP is to determine the price at which we would transact a sale if the solution were sold on a standalone basis. The determination of BESP is based on our review of available data points and consideration of factors such as but not limited to pricing practices, our growth strategy, geographies, customer segment and market conditions. The determination of BESP is made through consultation with and formal approval of our management, taking into consideration our go-to-market strategy.

We regularly review VSOE and have a review process for TPE and BESP and maintain internal controls over the establishment and updates of these estimates.

The adoption of this new authoritative guidance did not have a material impact on our consolidated financial statements and is not expected to have a material impact on our revenue in periods after the initial adoption when applied to multiple element agreements based on the currently anticipated business volume and pricing.

Prior to January 1, 2011 and pursuant to the previous accounting standards, we allocated revenue in a multiple element arrangement to each deliverable based on its relative fair value. If we did not have fair value for the delivered items, the contract fee was allocated to the undelivered items based on their fair values and the remaining residual amount, if any, was allocated to the delivered items. After the arrangement consideration, we applied the appropriate revenue recognition method from those described above for each unit of accounting, assuming all other revenue recognition criteria were met. All deliverables that did not meet the separation criteria were combined with an undelivered unit of accounting. We generally recognized revenue for a combined unit of accounting based on the method most appropriate for the last delivered item.

Goodwill and Other Intangible Assets

Goodwill represents the excess of costs over fair value of assets of businesses acquired. Goodwill and intangible assets with indefinite lives are not subject to amortization. Instead, the carrying amount of our goodwill and indefinite-lived intangibles is tested for impairment at least annually, in December, and between annual tests if events or significant changes in circumstances indicate that the carrying value may not be recoverable. An impairment loss would be recognized if the carrying amount exceeded the fair value.

We assess recoverability of goodwill at the reporting unit level. A reporting . . .

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