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DNB > SEC Filings for DNB > Form 10-K on 28-Feb-2014All Recent SEC Filings

Show all filings for DUN & BRADSTREET CORP/NW

Form 10-K for DUN & BRADSTREET CORP/NW


28-Feb-2014

Annual Report


Item 7. Management's Discussion and Analysis of Financial Condition and
Results 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 and other 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 and other businesses since they are not included in future revenue. There were no divestitures during the year ended December 31, 2013.
During the year ended December 31, 2012, we completed (a) the sale of: (i) the domestic portion of our Japanese operations to Tokyo Shoko Research Ltd. ("TSR Ltd."); (ii) our market research business in China, consisting of two joint venture companies; and (iii) a research and advisory services business in India; and (b) the shut-down of our Shanghai Roadway D&B Marketing Service Co. Ltd. ("Roadway") business. These businesses have been classified as "Divested and Other Businesses." These Divested and Other Businesses contributed 10% and 39% to our Asia Pacific total revenue for the years ended December 31, 2012 and 2011, respectively. See Note 14 and Note 17 to the consolidated financial statements included in Item 8. of this Annual Report on Form 10-K for further detail.
During the year ended December 31, 2012, we also completed the sale of: (i) AllBusiness.com, Inc.; (ii) Purisma Incorporated; and (iii) a small supply management company. These businesses have been classified as "Divested and Other Businesses." These Divested and Other Businesses contributed 1% to our North America total revenue for the year ended December 31, 2011. See Note 14 and Note 17 to the 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. The change in our operating performance 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 excludes 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 we believe do not reflect our underlying business performance. 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. See Note 14 to the 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. 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 re-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 the 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, online application that offers customers a subscription based real time access to our most complete and up-to-date global 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.
Effective January 1, 2013, we began managing and reporting our North America Risk Management Solutions business as:

•         DNBi subscription plans - interactive, online application that offers
          customers a subscription based real time access to our most complete
          and up-to-date global information, comprehensive monitoring and
          portfolio analysis. DNBi subscription plans are contracts that allow
          customers' unlimited use. In these instances, we recognize revenue
          ratably over the term of the contract;



•         Non-DNBi subscription plans - subscription contracts which provide
          increased access to our risk management reports and data to help
          customers increase their profitability while mitigating their risk. The
          non-DNBi subscription plans allow customers' unlimited use. In these
          instances, we recognize revenue ratably over the term of the
          contract; and



•         Projects and other risk management solutions - all other revenue
          streams. This includes, for example, our Business Information Report,
          our Comprehensive Report, our International Report, and D&B Direct.

Management believes that these measures provide further insight into our performance and the growth of our North America Risk Management Solutions revenue. Therefore, we no longer report our Risk Management Solutions business on a traditional, value-added and supply management solutions basis for any segment.

Within our North America Sales & Marketing Solutions, we monitor the performance of our "Traditional" products and our "Value-Added" products.

Our Traditional Sales & Marketing Solutions generally consist of our marketing lists and labels used by customers in their direct mail and marketing activities, our education business and our electronic licensing solutions. Effective January 1, 2013, we began managing and reporting our Internet business as part of our Traditional Sales & Marketing Solutions set. Our Internet business provides highly organized, efficient and easy-to-use products that address the online sales and marketing needs of professionals and businesses, including information on companies, industries and executives.

Our Value-Added Sales & Marketing Solutions generally include decision-making and customer information management solutions, including data management solutions like D&B Optimizer™ (which transforms our customers' prospects and data into up-to-date, accurate and actionable commercial insight) and products introduced as part of our Data-as-a-Service (or "DaaS") Strategy, which integrates our data directly into the applications and platforms that our customers use every day. Customer Relationship Management ("CRM") was our first area of focus, with D&B360®, which helps CRM customers manage their data, increase sales and improve customer engagement. In addition, we have a strategic alliance with Salesforce.com with respect to Salesforce's Data.com product. This product combines our business data with Salesforce's contact data directly into their CRM application. The vision for DaaS is to make D&B's data available wherever and whenever our customers need it, thereby powering more effective business processes.


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.
Overview
On January 1, 2012, we began managing and reporting our business through the following three segments (all prior periods had been reclassified to reflect the new segment structure):

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

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

•         Europe and Other International Markets (which primarily consists of our
          operations in the U.K., the Netherlands, Belgium, Latin America and
          European Worldwide Network).

During 2011, we managed and reported our business globally through the following three segments:

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

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

•         Europe and Other International Markets (which primarily consisted of
          our operations in the U.K., the Netherlands, Belgium, Latin America and
          our total Worldwide Network).

The financial statements of our subsidiaries outside North America reflect a fiscal year ended November 30 to facilitate the timely reporting of our consolidated financial results and consolidated financial position. The following table presents the contribution by segment to total revenue and core revenue:

                                           For the Years Ended December 31,
                                          2013           2012           2011
Total Revenue:
North America                              74 %           74 %           71 %
Asia Pacific                               11 %           12 %           15 %
Europe and Other International Markets     15 %           14 %           14 %
Core Revenue:
North America                              74 %           74 %           75 %
Asia Pacific                               11 %           11 %           10 %
Europe and Other International Markets     15 %           15 %           15 %


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

                                                For the Years Ended December 31,
                                               2013           2012           2011
Total Revenue by Customer Solution Set (1):
Risk Management Solutions                       63 %           63 %           61 %
Sales & Marketing Solutions                     37 %           36 %           33 %
Core Revenue by Customer Solution Set:
Risk Management Solutions                       63 %           64 %           65 %
Sales & Marketing Solutions                     37 %           36 %           35 %

(1) Our Divested and Other Businesses contributed 1% and 6% to our total consolidated revenue for each of the years ended December 31, 2012 and 2011, respectively. See Note 14 and Note 17 to the consolidated financial statements included in Item 8. of this Annual Report on Form 10-K for further detail.

Our customer solution sets are discussed in greater detail in "Item 1. Business" of this Annual Report on Form 10-K.
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 the 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." 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 U.S. Qualified Plan covered active and retired employees. 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 U.S. Qualified 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. During 2010, in conjunction with a determination letter review, we updated certain portions of the U.S. Qualified Plan's cash balance pay credit scale, along with the minimum interest crediting rate, retroactive to January 1, 1997, to ensure that the plan complies with the accrual rules in the Internal Revenue Code. We received a favorable determination letter for the U.S. Qualified Plan in October 2010 in conjunction with these changes.

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 14% of our pension obligation, respectively, at December 31, 2013. 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 ("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 with retirement benefits through defined benefit plans, representing the remaining balance of our pension obligations.

We also provide various health care benefits for retirees. U.S. based employees, hired before January 1, 2004, who retire with 10 years of vesting service after age 45, are eligible to receive benefits. Postretirement benefit costs and obligations are


determined actuarially. During the first quarter of 2010, we eliminated company-paid life insurance benefits for retirees and modified our sharing with retirees of the Retiree Drug Subsidy that we expect to receive. Effective July 1, 2010, we elected to convert the current prescription drug program for retirees over 65 to a group-based company sponsored Medicare Part D program, or Employer Group Waiver Plan ("EGWP"). Under this change, in 2013, we started to use the Part D subsidies delivered through the EGWP each year to reduce net company retiree medical costs until net company costs are completely eliminated. At that time, the Part D subsidies will be shared with retirees going forward to reduce retiree contributions.
The key assumptions used in the measurement of the pension and postretirement obligations and net periodic pension and postretirement costs 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 the 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 2014, we will use an expected long-term rate of return of 7.75%. This assumption was 7.75% in each of the years 2013 and 2012, and 8.25% in 2011. The 7.75% 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, 2013, the U.S. Qualified Plan was 55% invested in publicly traded equity securities, 42% invested in debt securities and 3% invested in real estate investments. 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.
Based on factors (discussed above), the discount rate is adjusted at each remeasurement date while other assumptions are reviewed annually. Changes in the discount rate, rate of compensation increase and cash balance accumulation/conversion rates do not have a significant effect on our annual operating income primarily as a result of freezing the pension benefits related to our U.S. Qualified Plan (discussed above). The discount rate used to determine pension cost for our U.S. pension plans was 3.54%, 4.05% and 5.06% for 2013, 2012 and 2011, respectively. For 2014, we increased the discount rate to 4.44% from 3.54% 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, 2013 and 2012 were $920.3 million and $1,171.6 million, respectively, of which $703.0 million and $913.3 million, respectively, were attributable to the U.S. Qualified Plan, $95.6 million and $127.9 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 the 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 2014 net periodic pension cost of $26.9 million, $5.3 million and $3.5 million for the U.S. Qualified Plan, U.S. Non-Qualified Plans and non-U.S. plans, respectively, compared to $32.8 million, $7.2 million and $3.8 million, respectively, in 2013. The lower amortization of actuarial loss in 2014 for the U.S. Qualified plan, which will be included in our pension cost in 2014, is primarily due to a higher discount rate and lower unrecognized actuarial loss subject to amortization in 2014 as result of the investment gains in 2013. 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 $24.9 million, $17.7 million and $7.1 million for the years ended December 31, 2013, 2012 and 2011, respectively. A major component of the net pension periodic cost is the expected return on plan assets, which was $94.1 million, $99.3 million and $110.4 million for the years ended December 31, 2013, 2012 and 2011, 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, 2013, a total investment gain of $178.1 million which was comprised of a gain of $156.3 million in our U.S. Qualified Plan and a gain of $21.8 million in our non-U.S. plans, (ii) for the year ended December 31, 2012, a total investment gain of $128.1 million which was comprised of a gain of $113.4 million in our U.S. Qualified Plan and a gain of $14.7 million in our non-U.S. plans; and
(iii) for the year ended December 31, 2011, a total investment gain of $39.3 million which was comprised of a gain of $27.7 million in our U.S. Qualified Plan and a gain of $11.6 million in our non-U.S. plans. At January 1, 2014, the market-related value of plan assets of our U.S. Qualified Plan and the non-U.S. plans was $1,148.9 million and $242.9 million, respectively, compared with the fair value of its plan assets of $1,200.5 million and $251.2 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 are amortized out of equity (deficit) based on an actuarial calculation during 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. As a result, we recorded net income of $148.9 million and a net loss of $62.6 million in OCI, net of applicable tax, in the years ended December 31, 2013 and 2012, respectively. The higher income in 2013 was primarily due to improved funded status driven by better asset performance in 2013 for our U.S. Qualified Plan and higher discount rate at December 31, 2013 for our U.S. Qualified Plan and U.S. Non-Qualified Plan. Net funded status for our global pension plans was a deficit of $375.9 million at December 31, 2013 compared to $653.3 million at December 31, 2012. The funded status for our U.S. . . .

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