Equifax Inc. — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016; comparisons are with Q1 2015 unless otherwise noted. Amounts are in U.S. dollars. Equifax provides credit and other information solutions, workforce and verification services, and consumer products. It completed its acquisition of Veda on February 24, 2016.
Financial performance
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Revenue | $728.3 million | $651.8 million | Up 12% |
| Operating income | $176.2 million | $154.2 million | Up 14% |
| Operating margin | 24.2% | 23.7% | Up 0.5 percentage points |
| Net income attributable to Equifax | $102.1 million | $88.3 million | Up 16% |
| Diluted EPS | $0.85 | $0.73 | Up 16% |
| Cash from operating activities | $90.3 million | $102.9 million | Down $12.6 million |
| Capital expenditures | $40.2 million | $21.6 million | Up $18.6 million |
Revenue growth reflected broad-based organic gains and Veda; foreign exchange reduced revenue by $18.9 million, or 3%, on a constant-currency comparison. Operating expenses rose 11%, below revenue growth. The effective tax rate fell to 33.5% from 34.9%. Cash flow from operations declined mainly due to higher receivables and lower current liabilities, partly offset by higher net income.
Segments and material changes
- U.S. Information Solutions: Revenue $294.9 million, up 4%; operating income $122.8 million versus $123.1 million. Margin fell to 41.6% from 43.3%, reflecting higher litigation and people costs.
- International: Revenue $158.1 million, up 17%; operating income fell to $19.4 million from $27.1 million and margin contracted to 12.3% from 19.9%. Veda contributed to growth; acquired-intangible amortization, acquisition costs, and weaker margins in Latin America and Canada weighed on profit. Currency reduced revenue by $18.0 million.
- Workforce Solutions: Revenue $180.1 million, up 21%; operating income $78.6 million, up 31%, and margin increased to 43.6% from 40.3%.
- Global Consumer Solutions: Revenue $95.2 million, up 14%; operating income $27.0 million, up 21%, and margin rose to 28.3% from 26.9%.
Veda’s purchase price was approximately $1.7 billion in cash, plus approximately $189.5 million of debt assumed. Preliminary allocation included $1.4 billion of goodwill and $654.6 million of identifiable intangible assets; purchase accounting remained subject to adjustment. Veda contributed $25.6 million of revenue after acquisition, while its earnings contribution was not material. Pro forma Q1 2016 revenue assuming Veda ownership from the start of the period was $765.0 million and Equifax-attributable net income was $101.5 million; the filing cautions that pro forma results are not necessarily indicative.
Liquidity, debt and capital allocation
Cash and cash equivalents were $96.8 million at March 31, 2016, versus $93.3 million at year-end. Total debt was $3.08 billion, compared with $1.20 billion at December 31, 2015; net debt was reported as $3.07 billion. The increase principally funded Veda. Debt included $661.7 million of commercial paper, $475.0 million drawn on the 364-day revolver, and $790.0 million outstanding on the term loan. The company reported $237.8 million available under its main revolver and $325 million available under the 364-day facility.
Current liabilities increased to $1.73 billion from $603.8 million, including $1.19 billion of short-term debt and current maturities. Management said operating cash generation and credit facilities were expected to fund anticipated requirements for the foreseeable future. The leverage covenant was temporarily increased from 3.5-to-1.0 to 4.0-to-1.0 for four quarters beginning Q1 2016; Equifax reported compliance at quarter-end. It paid $39.2 million in shareholder dividends, or $0.33 per share, and made no program share repurchases; $667.2 million remained authorized.
Outlook, risks and unusual items
- Management expected modest U.S. economic and consumer-credit growth for the remainder of 2016, with mortgage originations flat to slightly down. It described international conditions as challenging and expected exchange rates to weigh on reported U.S.-dollar revenue and profit.
- Long-term targets were 6%–8% average organic revenue growth, plus 1%–2% from strategic acquisitions, with EPS expected to grow somewhat faster than revenue. These are forward-looking expectations, not a specific Q2 or full-year 2016 earnings forecast.
- Q1 2016 other expense included a $15.4 million net loss on foreign-currency options used as economic hedges for Veda. Total interest expense increased to $20.1 million from $16.1 million as debt rose.
- Q1 2015 included a $20.7 million restructuring charge; associated payments were substantially completed in Q1 2016. The absence of that charge supported year-over-year comparisons.
- Legal and regulatory matters included a continuing Mississippi attorneys general investigation, a CFPB investigation concerning consumer-report and monitoring products, and ongoing litigation. The company said outcomes could not be predicted for the cited investigations; recorded legal accruals were not material. It reported no material change in previously disclosed risk factors.
- Management reported effective disclosure controls and no material quarterly change in internal control over financial reporting. Foreign-currency exposure, acquisition integration and financing, litigation, and credit-market access remain relevant risks.
Investor verification priorities
- Track Veda integration, realized growth and margins, and any changes to the preliminary purchase-price allocation and goodwill.
- Review debt maturities, commercial-paper refinancing, facility availability, leverage-covenant headroom and the effect of variable rates.
- Assess whether operating cash flow recovers as receivables and working-capital movements normalize, alongside the higher capital-spending level.
- Separate organic growth from acquisition contributions and currency effects, particularly in International and the segment-margin trend.
- Monitor outcomes and potential costs from the CFPB, Mississippi and other legal or regulatory matters, as well as the continuing consumer-assistance commitments.
- Compare actual results with management’s stated economic assumptions and long-term growth targets; the filing does not provide a clear numerical full-year 2016 revenue or EPS guidance range.