Equifax Inc. — Q2 2018 Form 10-Q
Reporting period: Three and six months ended June 30, 2018; comparisons are with the corresponding 2017 periods. Amounts are in millions except per-share data.
Business context
Equifax provides consumer and commercial information, analytics, verification and workforce services, and consumer credit-monitoring products. It reports four segments: U.S. Information Solutions (USIS), International, Workforce Solutions and Global Consumer Solutions.
Financial results and key metrics
| Metric | Q2 2018 | Q2 2017 | First half 2018 | First half 2017 |
|---|---|---|---|---|
| Revenue | $876.9 | $856.7 | $1,742.6 | $1,689.0 |
| Operating income | $193.6 | $265.9 | $337.8 | $484.5 |
| Operating margin | 22.1% | 31.0% | 19.4% | 28.7% |
| Net income attributable to Equifax | $144.8 | $165.4 | $235.8 | $318.7 |
| Diluted EPS | $1.19 | $1.36 | $1.94 | $2.61 |
| Operating cash flow | $235.2 | $225.4 | $354.8 | $329.1 |
- Q2 revenue grew 2%, while operating expenses rose 16%; first-half revenue grew 3%, while expenses rose 17%. Cost increases included cybersecurity-related and incremental IT/security spending, personnel, royalties and higher depreciation and amortization.
- International and Workforce Solutions drove revenue growth. Q2 revenue increased 8% in International and 7% in Workforce Solutions; USIS fell 2% and Global Consumer Solutions fell 5%.
- First-half cash used in investing was $149.4, including $118.7 of cash capital expenditures and $30.7 for acquisitions. Cash and cash equivalents were $327.4 at June 30, versus $336.4 at year-end 2017.
- Total debt was $2,654.0 before discounts and issuance costs; debt net of those costs was $2,632.4. Equifax issued $1,000.0 of senior and floating-rate notes in May, using proceeds to repay commercial paper, revolver and term-loan borrowings. At quarter-end, no commercial paper or revolver borrowings were outstanding.
- Liquidity included $884.5 available under the revolver and $216.8 available under the receivables facility. The company reported compliance with debt covenants; the revolver requires a maximum leverage ratio of 3.5 to 1.0.
- The quarterly dividend was $0.39 per share; $93.9 was paid to shareholders in the first half. No shares were repurchased under the program; $590.1 remained authorized.
Material changes and management outlook
- The 2017 cybersecurity incident continued to weigh on results through customer-related impacts and higher operating costs. Equifax stopped advertising its U.S. consumer business after the incident and said it did not intend to resume paid-product advertising through Q3 2018.
- Management expected the incident to negatively affect 2018 revenue, principally in U.S. businesses, and anticipated significant future professional-services costs, IT/security expenses and capital investment, as well as higher insurance, compliance and legal/regulatory costs. The ultimate increases were not quantified.
- Management’s economic outlook was mixed: U.S. second-half 2018 activity was expected to ease from first-half levels; mortgage originations were forecast to decline mid-to-high single digits for 2018. The filing also anticipated continued weakness in Argentina and softer second-half activity in the U.K. and Spain. No consolidated numerical earnings or revenue guidance is provided in the supplied filing text.
- The effective tax rate declined to 13.7% for Q2 and 18.0% for the first half, versus 30.9% and 26.3%, respectively, in 2017. The Tax Act reduced rates; Q2 also benefited from a settlement of uncertain tax positions.
- Cybersecurity-related lawsuits and government investigations were numerous and at preliminary stages. Equifax said losses were reasonably possible but could not estimate a range; ultimate payments could be material. On June 13, 2018, CFPB and FTC staff notified the company they were considering recommending agency legal action, potentially seeking injunctive relief, damages and civil penalties. A state banking regulators’ consent order was entered June 25.
- Equifax identified approximately 2.4 million additional U.S. consumers whose names and partial driver’s-license information were stolen but who were not in the previously identified group of approximately 145.5 million. The filing said there was no evidence that core consumer, employment/income or commercial reporting databases were accessed.
Important facts for investors to verify
- How cybersecurity litigation, regulatory investigations and the state regulators’ consent order develop, including any eventual losses, penalties or operating requirements.
- The scale and duration of incident-related expenses, security investment and any further effects on U.S. consumer revenue; insurance coverage is $125.0 with a $7.5 deductible, and $95.0 of recoveries had been recorded and received through June 30.
- Whether revenue growth can recover as operating costs rise, particularly given the substantial year-over-year decline in operating margin and earnings.
- Execution against economic and mortgage-market expectations, and segment performance—especially USIS and Global Consumer Solutions.
- Debt, financing costs and covenant headroom as the company funds security, legal and compliance needs; the filing reports 89% fixed-rate and 11% effectively variable-rate debt at quarter-end.