Equifax 2006 Annual Report Download - page 30

MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
28 EQUIFAX 2006 ANNUAL REPORT
We are also committed to improving our operating effi -
ciency through our organizational realignment by reducing
layers of management, utilizing Global Centers of Excellence,
and better aligning of our business units, which includes a
sales structure that is more customer-focused.
Some of the specifi c initiatives required to execute this
strategy may result in an increase in capital expenditures
or cash investment in future periods. See the Liquidity and
Financial Condition section within MD&A for information
regarding sources and uses of cash.
RESULTS OF OPERATIONS – TWELVE MONTHS
ENDED DECEMBER 31, 2006 AND 2005
Consolidated Financial Results
Operating Revenue
Consolidated operating revenue for the twelve months ended
December 31, 2006 increased $102.9 million, or 7%, from
$1,443.4 million in 2005 to $1,546.3 million in 2006. This
increase is due to broad-based growth across most lines of
business and geographies, and a favorable foreign currency
impact of $18.7 million, partially offset by a $13.4 million, or
16%, decline in Mortgage Solutions within the Information
Services segment.
Operating Expenses and Operating Margin
Consolidated operating expenses increased $88.8 million,
or 9%, to $1,110.2 million for the twelve months ended
December 31, 2006, as compared to $1,021.4 million for
the same period in 2005.
Cost of services in 2006 increased $32.2 million, or 5%,
to $626.4 million when compared to the same period in
2005. The increase in cost of services was primarily due to
operating revenue growth, and increased salary expenses
due to higher headcount.
Selling, general and administrative expenses for
the twelve months ended December 31, 2006 increased
$56.0 million, or 16%, to $401.0 million when compared
to the same period a year ago. This increase was mainly
due to the $7.6 million incremental negative impact of
adopting SFAS No. 123R, “Share-Based Payment,” (“SFAS
123R”) on January 1, 2006; $7.5 million in loss contingencies
related to certain pending legal matters; a $6.4 million sev-
erance charge recognized during the fourth quarter of 2006
related to our organizational realignment; $3.2 million in
additional benefi t costs associated with our former Chief
Financial Officer’s (“CFO”) and Chief Administrative
Officer’s (“CAO”) decisions to retire during the twelve
months ended December 31, 2006; higher salary expenses
due to increased headcount; and increased professional fees.
These increases were partially offset by higher salary and
incentive costs in the twelve months ended December 31,
2005 related to our Chief Executive Offi cer (“CEO”) tran-
sition. For additional information about the impact of
SFAS 123R, see Note 2 of the Notes to Consolidated
Financial Statements.
Consolidated operating margin for the twelve months
ended December 31, 2006 was 28.2% as compared to 29.2%
for the same period in 2005. The decline in operating mar-
gin was primarily driven by the loss contingencies related to
certain pending legal matters, the negative incremental
impact of adopting SFAS 123R and the charge related to our
organizational realignment. See Notes 6 and 15 of the Notes
to Consolidated Financial Statements for additional infor-
mation about the activity related to the loss contingencies
and the organizational realignment, respectively.
Other Income, Net
Consolidated other income, net, increased to $16.2 million
for the twelve months ended December 31, 2006, as com-
pared to $9.2 million in the same period in 2005. This
increase is primarily due to a favorable settlement of claims
against certain former shareholders of Naviant, Inc. in
September 2006. In 2004, we served a demand for arbitra-
tion, alleging, among other things, that the sellers had
breached various representations and warranties concerning
information furnished to us in connection with our acquisi-
tion of Naviant, Inc. in 2002. As a result of this settlement,
we recognized a $14.1 million non-taxable gain in other
income, net, on our Consolidated Statement of Income for
the twelve months ended December 31, 2006 (as discussed in
Note 6 of the Notes to Consolidated Financial Statements).
This increase was partially offset by a $3.3 million gain in
2005 related to an agreement with Risk Management
Alternatives (“RMA”) Holdings, LLC, which was amended
to, among other things, reduce the scope of services we
were obligated to provide.
Income Taxes
Our effective income tax rate was 34.0% for the twelve
months ended December 31, 2006, down from 36.9% for
the same period in 2005. The reduction was due primarily
to the reversal of $9.5 million in income tax reserves
related to uncertain tax positions for which the applicable
statute of limitations expired in the third quarter of 2006
and the $14.1 million non-taxable gain on the litigation set-
tlement associated with Naviant, Inc. during the second
quarter of 2006, offset by an increase in foreign tax expense
during 2006. For additional information about our effec-
tive tax rate, see Note 7 of the Notes to Consolidated
Financial Statements.
Net Income
Net income for the twelve months ended December 31,
2006, was $274.5 million, compared to $246.5 million for
the twelve months ended December 31, 2005. Earnings per
share increased to $2.12 for the twelve months ended
December 31, 2006, as compared to $1.86 for the same
period a year ago.