Equifax Inc. — Q3 2017 Form 10-Q
Business context and reporting period. This unaudited quarterly report covers the three and nine months ended September 30, 2017, compared with the corresponding 2016 periods. Equifax provides credit and other information services, workforce verification and related services, and consumer credit-monitoring and identity-protection products. Its four reportable segments are U.S. Information Solutions (USIS), International, Workforce Solutions, and Global Consumer Solutions (GCS).
Financial results and liquidity
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Revenue | $834.8 million | $804.1 million | $2,523.8 million | $2,343.8 million |
| Operating income | $152.9 million | $212.1 million | $633.8 million | $614.0 million |
| Operating margin | 18.3% | 26.4% | 25.1% | 26.2% |
| Net income attributable to Equifax | $96.3 million | $132.8 million | $415.0 million | $365.8 million |
| Diluted EPS | $0.79 | $1.09 | $3.41 | $3.02 |
| Cash provided by operating activities | $279.6 million | $245.0 million | $608.7 million | $544.2 million |
- For the nine months, capital expenditures were $157.5 million; cash used in investing activities was $226.2 million and cash used in financing activities was $202.8 million.
- At September 30, cash and cash equivalents were $315.4 million. Total debt was $2,717.8 million, including $667.8 million classified as short-term or current maturities. Commercial paper outstanding was $665.3 million.
- At September 30, $234.2 million was available under the revolving credit facility. Equifax subsequently borrowed $100 million under the facility on October 12, 2017. The company reported compliance with its debt covenants.
- The effective tax rate was 26.1% for Q3 and 26.2% year to date, compared with 29.1% and 32.1%, respectively, in 2016. The filing attributes the lower rates primarily to stock-compensation tax accounting and, year to date, a tax-audit settlement adjustment.
Material changes and segment performance
- Q3 revenue rose 4%, but operating income fell 28%, net income attributable to Equifax fell 27%, and diluted EPS fell 28%. The principal reported pressure was cybersecurity-incident costs; USIS and GCS operating income also declined.
- Year-to-date revenue increased 8%, operating income 3%, net income attributable to Equifax 13%, and diluted EPS 13%. The filing cites growth across segments, lower tax expense, and partial offset from cybersecurity costs and higher amortization related to Veda.
- International revenue increased 12% in Q3 and 16% year to date; Workforce Solutions revenue increased 9% and 10%. USIS revenue declined 3% in Q3 but increased 3% year to date. GCS revenue was essentially flat in Q3 and up 1% year to date.
- International and Workforce Solutions operating income improved. International’s reported margin benefited from lower Veda integration costs and product mix; Workforce Solutions benefited from growth and mix. Q3 USIS and GCS margins declined.
- Q3 SG&A increased $78.8 million year over year. The MD&A attributes the increase in part to an $87.5 million cybersecurity-related accrual, while the financial-statement note separately reports $27.3 million of pretax cybersecurity expenses for the quarter. The supplied filing text does not clearly reconcile these disclosures.
Outlook, risks, contingencies, and unusual items
- Management expected modest U.S. economic and consumer-credit growth for the remainder of 2017, lower mortgage-market volumes for the full year, and modest growth in several international markets. Stronger foreign exchange rates were expected to support reported results in the second half.
- The cybersecurity incident was expected to weigh on revenue, particularly in U.S. businesses, in 2017 and 2018. Equifax also anticipated significant legal, consulting, consumer-service, IT-security, compliance, insurance, and related costs and capital investment. It had ceased advertising for new direct-to-consumer business and expected that business’s revenue to continue declining.
- The incident involved unauthorized access from mid-May through July 2017 and potentially affected approximately 145.5 million U.S. consumers. Data accessed included personal identifying information; credit-card numbers for approximately 209,000 U.S. and Canadian consumers and dispute documents for approximately 182,000 U.S. consumers were also accessed. Approximately 8,000 Canadian consumers were affected, and approximately 690,000 U.K. consumers were to be contacted.
- Equifax had incurred $4.7 million through September 30 for free U.S. consumer credit monitoring and identity protection and estimated additional costs of $56 million to $110 million; it accrued the low end of the range. It had not recorded an insurance receivable. The company said it could not estimate potential losses from related litigation and investigations.
- More than 240 consumer class actions had been filed, alongside financial-institution and shareholder actions and numerous government inquiries and investigations. The company said adverse outcomes could entail fines, other obligations, or changes to its operations; additional claims and inquiries were possible.
- The cybersecurity review identified two significant deficiencies in IT general controls. Management said remediation actions were underway and concluded disclosure controls were effective at period end; the company planned to consider the review’s outcome in its year-end ICFR assessment.
- The annual goodwill impairment test found no impairment, but Asia Pacific had only a 5% fair-value cushion over carrying value and management described it as more sensitive to changes in assumptions. Management also noted potential sensitivity in Employer Services to changes affecting Affordable Care Act compliance services.
Important facts for investors to verify
- How cybersecurity costs, accruals, future spending, insurance recovery, and litigation or regulatory exposure develop; clarify the filing’s $27.3 million expense and $87.5 million accrual disclosures.
- Whether the breach affects customer retention, delayed projects, U.S. direct-to-consumer revenue, and future segment margins beyond management’s stated expectations.
- Whether IT-control remediation is effective and whether subsequent ICFR assessments identify further deficiencies.
- Commercial-paper refinancing needs, revolving-credit availability, leverage, and credit-rating changes, given the debt balance and negative outlook at S&P reported in the filing.
- Whether International and Workforce Solutions growth can offset continuing pressure in USIS and GCS, and whether Asia Pacific goodwill assumptions remain supportable.