Equifax Inc. — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022; unaudited. Equifax provides credit and other information, analytics, verification, and workforce services. Unless otherwise stated, amounts are in U.S. dollars.
Financial performance and condition
- Q3 revenue: $1.244 billion, up 2% from $1.223 billion. Operating income was $242.9 million, down 11%; operating margin was 19.5%, versus 22.3%. Net income attributable to Equifax was $165.7 million, down 19%; diluted EPS was $1.34, versus $1.66.
- First nine months: Revenue was $3.924 billion, up 7%. Operating income was $880.0 million, down 1%, and operating margin was 22.4%, versus 24.1%. Net income attributable to Equifax was $588.0 million, down 5%; diluted EPS was $4.77, versus $5.04.
- Drivers and costs: Workforce Solutions and International revenue growth was partly offset by weaker U.S. Information Solutions (USIS), particularly mortgage-related activity. Higher service costs and depreciation and amortization outpaced revenue growth. Q3 interest expense rose to $47.1 million from $35.0 million.
- Cash flow and investment: Nine-month operating cash flow was $431.7 million, versus $949.5 million. The decrease reflected the $345.0 million consumer settlement payment and increased working capital. Capital expenditures were $468.4 million, compared with $332.9 million; cash used for acquisitions was $437.5 million. Q3 operating cash flow was $354.9 million, versus $398.4 million.
- Liquidity and debt: Cash was $241.7 million at September 30, 2022; total debt was $5.913 billion, including $1.063 billion of short-term debt and current maturities. Revolver availability was $1.337 billion, and the company reported covenant compliance. Equifax issued $750 million of 5.1% notes in September and repaid $500 million of notes due December in October 2022. The company said available cash, operating cash flow, credit facilities and debt-market access should meet requirements for the next 12 months and beyond.
- Other metrics: The quarterly dividend remained $0.39 per share; $143.3 million of dividends were paid in the first nine months. No open-market share repurchases were made in that period. Foreign currency translation reduced comprehensive income by $300.1 million in the first nine months.
Material changes and business trends
- Workforce Solutions: Q3 revenue rose 9% to $558.9 million; operating income fell 9% to $231.0 million and margin declined to 41.3% from 49.4%. Verification growth, including non-mortgage activity and acquisitions, outweighed mortgage weakness; Employer Services revenue declined 7% in Q3.
- USIS: Q3 revenue fell 9% to $397.4 million; operating income fell 36% to $82.0 million and margin declined to 20.6% from 29.2%. Higher interest rates and lower mortgage inquiries weighed on online and mortgage services.
- International: Q3 revenue increased 6% to $288.0 million and operating income rose 31% to $42.5 million. Revenue grew 17% on a local-currency basis; currency movements reduced reported results.
- The company completed acquisitions including Efficient Hire, Data Crédito, LawLogix and Midigator. Purchase price allocations for the third-quarter acquisitions were not final. Equifax also sold its Russian equity-method investment.
Outlook, risks and unusual items
- Management expected U.S. 2022 economic activity to grow, but more slowly than in 2021, and expected modest growth in consumer credit excluding mortgage. Its outlook assumed U.S. mortgage credit inquiries would decline by more than 50% year over year on average during the final three months of 2022; mortgage activity was expected to remain weak in Q1 2023. International growth was expected to be slower than in 2021, particularly in Latin America. These are management expectations, not a detailed financial guidance range.
- Management cited uncertainty from rising interest rates, inflation, currency movements, economic conditions and the continuing effects of COVID-19. Higher rates and weak mortgage activity are direct demand risks.
- 2017 cybersecurity incident: Most related proceedings were resolved, but Canadian class actions and a U.K. FCA investigation remained ongoing. The U.S. consumer settlement became effective in January 2022; Equifax contributed $380.5 million to the fund and may contribute up to another $125 million if specified costs exhaust it. The company stated that losses above its previously recorded $800.9 million accrual were reasonably possible but could not be estimated and could be material.
- The CFPB was investigating Equifax’s consumer dispute process; the company said it could not predict the outcome. Other legal and regulatory matters could also result in material obligations.
- Annual goodwill testing found no impairment. The Asia Pacific reporting unit had a comparatively smaller fair-value cushion—greater than 5%—and management identified it as at risk of possible future impairment, sensitive to economic conditions and assumptions.
- Management reported disclosure controls were effective and no material change in internal control over financial reporting during the quarter. It reported no material changes to the risk factors in the 2021 Form 10-K.
Important facts for investors to verify
- Whether mortgage-market weakness and higher rates continue to pressure USIS and Workforce Solutions, and whether non-mortgage growth offsets that decline.
- Whether cost growth, technology-transformation spending and acquisition-related amortization continue to compress operating margins and cash generation.
- Debt maturities, refinancing costs and leverage following the 5.1% notes issuance and October repayment; confirm ongoing covenant compliance and liquidity.
- Developments in the Canadian litigation, FCA and CFPB matters, and whether cybersecurity-related payments exceed recorded accruals.
- Asia Pacific reporting-unit performance and impairment assumptions, including sensitivity to discount rates, projected cash flows, inflation and foreign exchange.