Equifax 2002 Annual Report Download - page 33

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
We believe that the likelihood of demand for payment under these
instruments is minimal and expect no material losses to occur in
connection with these instruments.
SUBSIDIARY FUNDS TRANSFER LIMITATIONS
The ability of certain of our subsidiaries and associated companies
to transfer funds is limited in some cases by foreign government
regulations. At December 31, 2002, the amount of equity subject to
such restrictions for consolidated subsidiaries was not material.
PENSION BENEFITS
During 2002, actual asset returns for our U.S. defined benefit pen-
sion plan were adversely impacted by the performance of the U.S.
stock market, resulting in a decrease in the market value of our
retirement plan assets. The fair value of our defined benefit pen-
sion plan assets decreased from $413.1 million at December 31,
2001 to $344.8 million at December 31, 2002. In addition, we
lowered our discount rate from 7.25% to 6.75%, which increased
our U.S. projected benefit obligations from $419.0 million to
$451.2 million. The negative investment performance and declin-
ing discount rates during 2002 created an unfunded status in
accordance with Statement of Financial Accounting Standards
No. 87 (“SFAS 87”) at December 31, 2002. As required under
SFAS 87, a non-cash minimum pension liability of $179.4 million
($112.4 million after tax) reducing shareholders’ equity was
recorded at December 31, 2002. The impact of our plan’s funded
status would be reversed, and shareholder’s equity consequently
restored, on December 31 of any year in which the fair value of
plan assets exceeded the accumulated benefit obligation as of that
date. Further, this adjustment had no impact on our income state-
ment, and did not affect cash flow or our compliance with any
financial covenants contained in any of our debt agreements.
We continually monitor and evaluate the level of pension contribu-
tions based on various factors that include, but are not limited to,
investment performance, actuarial valuation and tax deductibility.
While the asset return and interest rate environment have nega-
tively impacted the funded status of our U.S. defined benefit pen-
sion plan under SFAS 87, our minimum funding requirements, as
set forth in the Employment Retirement Income Security Act
(ERISA) and federal tax laws have been zero for the past five years.
In addition, we expect no mandatory funding requirements in 2003
or 2004. Although no minimum funding was required, at our dis-
cretion we contributed $20.0 million to our U.S. defined benefit
pension plan in 2002.
Our U.S. defined benefit pension plan delivered pension income of
$11.0 million in 2002, and approximately $8.6 million in 2001. The
annual pension income is calculated using a number of actuarial
assumptions, including the expected long-term rate of return on
assets and a discount rate. In determining the expected long-term
rate of return on assets, we evaluate input from our investment
consultants, investment management firms and actuaries. Addi-
tionally, we consider our historical 15-year compounded returns,
which have been in excess of our forward-looking return expecta-
tions. The expected long-term rate of return on this basis for 2002
was 9.5%. For determination of 2003 pension expense, the long-
term rate of return will be reduced to 8.75%. We believe that
8.75% is a reasonable long-term rate of return on assets, despite
the recent market downturn in which our plan assets had a return
loss of approximately 12.8% for the year ended December 31, 2002.
Our determination of pension income and expense is based on
a market related valuation of assets, which reduces year-to-year
volatility. This market related valuation of assets recognizes
investment gains and losses over a five-year period from the year
in which they occur. Investment gains and losses for this purpose
are the difference between expected return calculated using the
market related value of assets and the actual return on the market
related value of assets. Since the market related value of assets
recognizes gains or losses over a five-year period, the future value
of assets will be affected as previously deferred gains or losses
are recognized. Our U.S. cumulative unrecognized actuarial losses
at December 31, 2002 were $202.0 million. These unrecognized
losses will result in a decrease in our future pension income
depending on several factors, including their relative size to our
projected benefit obligation and market related value of plan assets.
The discount rate we utilize for determining future pension obli-
gations is based on the yield associated with Moody’s Long-Term
Aa-rated Corporate Bond Index. The discount rate determined on
this basis has decreased from 7.25% at December 31, 2001 to
6.75% at December 31, 2002.
INFLATION
We do not believe that the rate of inflation has had a material
effect on our operating results. However, inflation could adversely
affect our future operating results if it were to result in a substan-
tial weakening in economic conditions.
Recent Accounting Pronouncements. In January 2002, we
adopted SFAS No. 144, “Accounting for the Impairment or
Disposal of Long-Lived Assets.” The statement supersedes SFAS
No. 121, “Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to Be Disposed Of,” but retains the funda-
mental provisions of that statement related to the recognition and
measurement of the impairment of long-lived assets to be held
and used while expanding the measurement requirements of
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