Equifax Inc. — Q2 2016 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2016. Equifax provides credit and other information services, employment and income verification, workforce services, and consumer products. The quarter’s results include Veda, acquired February 24, 2016.
Financial performance
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Revenue | $811.3 million | $678.1 million | $1,539.6 million | $1,329.9 million |
| Operating income | $225.7 million | $188.5 million | $401.9 million | $342.7 million |
| Operating margin | 27.8% | 27.8% | 26.1% | 25.8% |
| Net income attributable to Equifax | $130.9 million | $111.0 million | $233.0 million | $199.3 million |
| Diluted EPS | $1.08 | $0.92 | $1.93 | $1.64 |
- Q2 revenue grew 20%; six-month revenue grew 16%. Growth reflected broad-based organic gains and Veda. Foreign exchange reduced reported revenue by $16.9 million in Q2 and $35.9 million for the first half.
- For the first half, cash from operations was $279.5 million versus $289.6 million; capital expenditures were $82.8 million versus $55.2 million. Q2 operating cash flow was $189.2 million versus $186.7 million.
- At June 30, cash was $96.8 million. Total debt was $2,960.0 million, including $444.8 million of commercial paper; balance-sheet long-term debt, net, was $2,498.7 million. The company reported $454.7 million available under its revolving facility and compliance with debt covenants.
- Effective tax rate was 34.0% for Q2 and 33.8% for the first half, above the comparable 2015 rates of 29.0% and 31.7%.
Material changes and segment results
- Veda added substantial scale to International: Q2 International revenue rose 51% to $218.8 million, while six-month revenue rose 34% to $376.9 million. Excluding Veda, International revenue grew 2% in Q2 and was flat for the first half; reported results were also affected by unfavorable currency movements.
- Workforce Solutions revenue increased 21% in both Q2 and the first half; operating margin expanded to 44.2% in Q2 from 38.3% and to 43.9% for the first half from 39.3%.
- US Information Solutions revenue grew 3% in both periods. Global Consumer Solutions revenue grew 21% in Q2 and 18% for the first half, but its operating margin declined to 24.0% in Q2 from 27.8%.
- Consolidated operating margin was flat in Q2 and improved 0.3 percentage points for the first half. Veda-related amortization and integration costs weighed on International margins; Workforce Solutions gains and lower corporate expense supported the overall first-half margin.
- The Veda acquisition cost approximately $1.7 billion in cash, with about $189.5 million of debt assumed. Goodwill increased to $3,971.6 million from $2,571.0 million, and purchased intangibles increased to $1,404.9 million from $827.9 million. Purchase accounting remained provisional.
Outlook, risks and unusual items
- Management expected modest U.S. economic and consumer-credit growth for the remainder of 2016 and mortgage originations to be flat to up mid-single digits for the full year. It cited challenging international conditions and currency headwinds. Long-term targets were 6%–8% organic revenue growth, plus 1%–2% from strategic acquisitions, and EPS growth somewhat faster than revenue. The filing gives no specific full-year 2016 revenue or EPS guidance.
- Management said operating cash generation and credit facilities should fund anticipated requirements for the foreseeable future. The company increased its quarterly dividend from $0.29 to $0.33 per share and paid $78.6 million in shareholder dividends in the first half. It made no share repurchases under the program during that period; $667.2 million remained authorized.
- Veda-related financing raised debt and interest expense. In May, Equifax issued $500 million of 2.3% notes due 2021 and $275 million of 3.25% notes due 2026, using proceeds partly to repay acquisition-related borrowings. The leverage covenant was temporarily raised to 4.0-to-1.0 through Q4 2016; Equifax reported compliance.
- Comparisons benefited from the absence of a $20.7 million 2015 restructuring charge and a $14.8 million 2015 investment impairment in the first half. Q2 2015 also included an $8.6 million state-tax benefit. In 2016, foreign-exchange options related to Veda generated a $15.4 million first-quarter loss.
- Legal matters include CFPB investigations of consumer-reporting products and Equifax Workforce Solutions. In May 2016, CFPB staff said they were considering recommending legal action regarding the earlier investigation; Equifax said the outcomes were uncertain. The filing also describes state attorneys general settlements involving consumer assistance and data accuracy, and continuing California bankruptcy litigation. Management said recorded legal accruals were not material.
- Other risks include economic and consumer-credit conditions, foreign exchange, acquisition integration and provisional purchase accounting, debt and refinancing exposure, regulatory scrutiny, litigation, and data-processing and outsourcing commitments. The company reported no material change to its previously disclosed risk factors.
Investor verification priorities
- Separate Veda’s contribution from organic growth and assess the continuing effects of currency movements and acquisition integration.
- Track debt, commercial-paper refinancing, covenant headroom, interest expense, and the planned use of cash after the acquisition.
- Review final Veda purchase-price allocations, acquired-asset amortization, goodwill impairment testing, and resulting segment profitability.
- Monitor CFPB investigations, state settlement implementation, and developments in the California litigation for potential financial or operational effects.
- Compare cash conversion and capital spending with earnings growth, and assess the sustainability of margin changes across segments.