Equifax Inc. — 2017 Form 10-K Summary
Business context and reporting period
Equifax provides consumer and commercial information, analytics, identity and fraud solutions, employment and income verification, and human resources outsourcing services. It reports through U.S. Information Solutions (USIS), International, Workforce Solutions, and Global Consumer Solutions (GCS). This annual report covers the fiscal year ended December 31, 2017; quarterly figures below identify the fourth quarter where relevant.
Financial performance and liquidity
| Metric | 2017 | 2016 | Change |
|---|---|---|---|
| Revenue | $3,362.2 million | $3,144.9 million | +7% |
| Operating income | $824.6 million | $817.9 million | +1% |
| Operating margin | 24.5% | 26.0% | Down 1.5 percentage points |
| Net income attributable to Equifax | $587.3 million | $488.8 million | +20% |
| Diluted EPS | $4.83 | $4.04 | +20% |
| Cash from operating activities | $816.0 million | $823.0 million | Down $7.0 million |
| Capital expenditures | $218.2 million cash outflow | $173.5 million cash outflow | Up $44.7 million |
| Total debt, net of discounts | $2,704.3 million | $2,672.2 million | Up $32.1 million |
Cash and cash equivalents were $336.4 million at year-end, versus $129.3 million a year earlier. Current assets were $998.4 million and current liabilities $1,673.5 million. The company reported $221.9 million available under its revolving credit facility and $204.3 million available under its receivables facility. It was in compliance with debt covenants. About 61% of debt was fixed rate and 39% variable rate.
USIS revenue was $1,262.7 million (+2%), International $932.3 million (+16%), Workforce Solutions $764.2 million (+9%), and GCS $403.0 million (approximately flat). International growth reflected broad-based organic gains and the Veda acquisition; Workforce Solutions growth was led by verification services. USIS operating margin was 42.7%, International 18.2%, Workforce Solutions 43.4%, and GCS 26.4%.
Fourth-quarter 2017 revenue was $838.5 million, versus $801.1 million in fourth-quarter 2016; operating income was $190.9 million versus $203.9 million; net income attributable to Equifax was $172.3 million versus $123.0 million; and diluted EPS was $1.42 versus $1.01.
Material changes versus the prior comparable period
- Revenue growth slowed to 7% in 2017 from 18% in 2016. The 2016 comparison benefited substantially from the Veda acquisition, completed in February 2016.
- Operating margin declined primarily because of cybersecurity-related costs. Operating income grew only 1% despite revenue growth.
- Net income and EPS rose faster than operating income, in part because the effective tax rate fell to 19.9% from 32.0%. The 2017 rate included a provisional $48.3 million Tax Act benefit and $26.7 million of stock-compensation tax benefits.
- Operating cash flow was slightly lower, while capital expenditures increased, including investment in technology, security, and system reliability.
- International revenue increased to 29% of total revenue from 27% in 2016, with Veda contributing materially to reported growth.
Outlook, risks, contingencies, and unusual items
- Cybersecurity incident: Attackers accessed personal information from mid-May through July 2017. The company identified approximately 145.5 million potentially affected U.S. consumers and subsequently identified another 2.4 million whose names and partial driver’s-license information were stolen. Information relating to Canadian and U.K. consumers was also affected. The investigation found no evidence that core consumer, employment and income, or commercial credit reporting databases were accessed.
- Costs and litigation: The filing presents cybersecurity expenses in different groupings: MD&A cites $113.3 million of incident expenses and $50.7 million for free consumer services; selected financial data reports $164.0 million of gross pretax expenses and $50.0 million of insurance recoveries, or $114.0 million net. The company expects significant additional legal, consulting, security, compliance, insurance, and consumer-service costs. Numerous class actions and governmental investigations are pending; the potential loss range was not estimable and could be material. The company maintained $125 million of cybersecurity insurance coverage above a $7.5 million deductible and had received $15 million, with a further $35 million receivable recorded at year-end.
- Management outlook: Equifax expected the incident to negatively affect 2018 revenue, principally in U.S. businesses and to a lesser extent in Canada and the U.K. It did not intend to advertise U.S. paid consumer products in the first half of 2018 and expected direct-to-consumer revenue to decline. It also forecast weaker U.S. mortgage originations in 2018 than in 2017, while expecting modest growth in U.S. consumer credit excluding mortgage. The filing provides no clear consolidated revenue or EPS guidance figure.
- Tax and balance-sheet considerations: The Tax Act’s rate reduction was expected to lower the ongoing U.S. tax rate, but several 2017 calculations were provisional and the company had not completed its analysis of certain provisions, including GILTI. Goodwill was $4.184 billion; the annual impairment test found no impairment, but Asia Pacific had a 5% fair-value cushion and was identified as more sensitive to changes in assumptions.
- Other exposures: Key risks include further cyber incidents, customer or data-supplier attrition, regulatory changes, litigation outcomes, foreign-exchange movements, competition, and debt refinancing. The company’s $965.3 million of short-term debt and current maturities included commercial paper and debt due in 2018.
Most important facts for investors to verify
- Progress, outcomes, and cash costs of cybersecurity-related lawsuits and investigations; whether further affected consumers or data types are identified; and the adequacy and collection of insurance recoveries.
- Actual 2018 revenue, margin, and cash-flow effects from customer decisions, halted U.S. consumer-product advertising, free services, and increased security spending.
- Whether the provisional Tax Act accounting changes materially, and how much of 2017 EPS growth reflects ongoing operations versus tax benefits.
- Debt repayment or refinancing plans for 2018 maturities, available facility capacity, covenant headroom, and the effect of variable interest rates.
- Asia Pacific goodwill valuation assumptions and whether cybersecurity impacts or operating performance changes could reduce the unit’s limited impairment cushion.
Ernst & Young issued unqualified opinions on the consolidated financial statements and internal control over financial reporting. Management reported that two significant IT general-control deficiencies identified in 2017 had been remediated by year-end.