Equifax Inc. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; unaudited. Comparisons are with the three months ended March 31, 2017, except balance-sheet comparisons, which are with December 31, 2017. Amounts are in U.S. dollars.
Business context and results
Equifax provides consumer and commercial information services, workforce verification and human-resources services, and consumer credit and identity-protection products. Its reportable segments are U.S. Information Solutions (USIS), International, Workforce Solutions, and Global Consumer Solutions.
- Operating revenue was $865.7 million, up 4% from $832.2 million. Foreign exchange increased revenue by approximately $11.0 million; International and Workforce Solutions drove reported growth.
- Operating income fell to $144.2 million from $218.6 million, down 34%. Operating margin contracted to 16.7% from 26.3%.
- Net income attributable to Equifax was $90.9 million versus $153.3 million, down 41%. Diluted EPS was $0.75 versus $1.26.
- Interest expense was $23.9 million, approximately flat year over year. The effective tax rate was 23.9% versus 20.6%; the prior-year rate benefited more from equity-award tax benefits and resolution of a tax examination.
Revenue by segment
| Segment | Q1 2018 revenue | Year-over-year change | Operating income / margin |
|---|---|---|---|
| USIS | $306.9 million | Down 1% | $110.9 million / 36.1% |
| International | $244.5 million | Up 13% reported; up 9% in local currency | $36.7 million / 15.0% |
| Workforce Solutions | $211.1 million | Up 6% | $90.1 million / 42.7% |
| Global Consumer Solutions | $103.2 million | Down 3% reported | $30.1 million / 29.2% |
USIS weakness reflected declines in core credit decisioning and certain commercial-risk and identity/fraud products, partly offset by mortgage growth. Workforce growth was led by Verification Services. Global Consumer Solutions revenue remained pressured after the company stopped advertising U.S. paid consumer products following the cybersecurity incident.
Cash flow, debt and liquidity
- Cash from operating activities was $119.6 million, compared with $103.7 million. Cash used in investing was $70.1 million, including $56.2 million of capital expenditures and $13.9 million for acquisitions. Cash used in financing was $138.3 million.
- Cash and cash equivalents were $249.3 million at quarter-end, down from $336.4 million at year-end 2017.
- Total debt was $2,638.5 million, including $888.5 million classified as short-term debt and current maturities. A $400 million term loan is due November 2018. Management reported $298.8 million available under the revolving credit facility and $214.7 million available under the receivables facility; no receivables-facility borrowings were outstanding.
- Equifax reported compliance with debt covenants. Its leverage covenant maximum was 3.5-to-1.0. At March 31, 63% of debt was fixed-rate and 37% effectively variable-rate.
- Operating cash flow exceeded dividends paid to Equifax shareholders of $46.9 million. The quarterly dividend was $0.39 per share; no open-market share repurchases were made, and $590.1 million remained authorized.
Material changes and unusual items
- Operating expenses rose 18% to $721.5 million. Cost of services increased 14% and SG&A increased 24%; management attributed the increases principally to cybersecurity-related costs, higher IT and data-security spending, people costs, royalties and insurance. General corporate expense more than doubled to $123.6 million, primarily due to the incident.
- The company recorded $4.1 million of Q1 SG&A expense for providing the free TrustedID Premier service. It expects significant future legal and professional-services expense and increased IT, security, insurance, compliance and customer-support costs. The amount of future costs is not yet determined.
- 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 population of approximately 145.5 million U.S. consumers; notification was underway. The filing said there was no evidence that core consumer, employment/income or commercial reporting databases were accessed.
- Hundreds of consumer class actions, financial-institution actions, government investigations and other proceedings relate to the incident. The company said losses are reasonably possible but cannot currently be estimated; eventual payments could be material to financial condition, results or cash flows. Equifax reported $125 million of cybersecurity insurance coverage above a $7.5 million deductible, $60 million of insurance recoveries recorded and $50 million received to date.
- Revenue increased only $0.6 million under the newly adopted revenue-recognition standard compared with the amount that would have been reported before adoption; prior-year comparative statements were not restated. The adoption increased retained earnings by $5.1 million at March 31, 2018.
Outlook and management commentary
The filing provides economic and business expectations, but no numerical company-wide revenue or earnings guidance. Management expected U.S. 2018 economic activity to be roughly flat with the second half of 2017, modest growth in consumer credit excluding mortgage, and lower mortgage originations year over year. Expectations varied by international market. Management anticipated the cybersecurity incident would weigh on 2018 revenue, particularly in U.S. businesses, and expected significant incident-related operating costs and capital investment in 2018 and beyond. The company did not intend to advertise U.S. paid consumer products during the remainder of the first half of 2018 and expected revenue declines for that period.
The company stated that operating cash generation was expected to fund anticipated requirements for the foreseeable future, but cautioned that sufficiently large incident-related judgments, settlements, penalties or other costs could adversely affect liquidity. Management concluded disclosure controls were effective at quarter-end and reported no material quarterly change in internal control over financial reporting.
Most important facts for investors to verify
- Progress, scope and potential financial outcomes of cybersecurity-related litigation, regulatory investigations and insurance recovery; the filing gives no estimable loss range.
- Actual incident-related expenses, security investment and revenue effects versus management’s expectations, including any recovery in U.S. consumer products.
- Whether International and Workforce Solutions growth can offset USIS and Global Consumer Solutions pressure, separating underlying growth from currency effects.
- Refinancing or repayment plans for the $400 million term loan due November 2018, and changes in debt, facility availability and covenant headroom.
- Cash generation and margins as higher operating costs continue; reported Q1 revenue growth did not translate into operating-income growth.