Equifax Inc. — FY2013 Form 10-K
Reporting period: Fiscal year ended December 31, 2013. This annual filing also reports fourth-quarter results. Amounts are in U.S. dollars; financial statement amounts are in millions unless noted.
Business context
Equifax provides consumer and business information, analytics, credit and identity solutions, employment and income verification, and human-resources outsourcing services. It reports five segments: U.S. Consumer Information Solutions (USCIS), International, Workforce Solutions, North America Personal Solutions, and North America Commercial Solutions. The largest client represented 2% of revenue; 77% of 2013 revenue came from the U.S.
Financial performance and liquidity
| Metric | FY2013 | FY2012 | Change |
|---|---|---|---|
| Operating revenue | $2,303.9 | $2,073.0 | +11% |
| Operating income / margin | $611.2 / 26.5% | $480.0 / 23.2% | +27%; +3.3 points |
| Continuing income attributable to Equifax | $333.4 | $266.6 | +25% |
| Net income attributable to Equifax | $351.8 | $272.1 | +29% |
| Diluted EPS from continuing operations | $2.69 | $2.18 | +23% |
| Diluted EPS, total | $2.84 | $2.22 | +28% |
| Cash provided by operating activities | $566.3 | $496.3 | +$70.0 |
| Capital expenditures | $83.3 | $66.0 | +$17.3 |
FY2013 operating margin improved as revenue growth and cost leverage in Workforce Solutions and the North America Personal and Commercial Solutions businesses outweighed investment and acquisition-related costs. No consolidated gross margin is separately stated in the filing.
At year-end, cash and cash equivalents were $235.9; total debt, net, was $1,442.0, down from $1,730.7. The company had no commercial paper or Senior Credit Facility borrowings outstanding and reported $748.6 available under its $750 million revolving facility. Its leverage ratio was 1.74 against a maximum covenant of 3.5; it reported compliance with covenants. The current portion of debt was $296.5. Cash dividends were $0.88 per share for the year.
Fourth-quarter 2013 revenue was $578.5, operating income $154.1, continuing income $78.9, and net income attributable to Equifax $76.7. In fourth-quarter 2012, these were $533.8, $92.2, $46.4, and $46.3, respectively; the 2012 quarter included a $38.7 pension settlement charge.
Material changes versus prior periods
- Revenue growth reflected the CSC Credit Services acquisition, completed in December 2012, and company growth initiatives. CSC contributed 14 percentage points of USCIS revenue growth in 2013.
- Mortgage-related revenue slowed markedly in the second half of 2013; management estimated lower mortgage activity reduced full-year revenue growth by about 1.7%.
- International revenue rose 6% as reported, but local currency growth was 10%; currency movements reduced revenue by $19.6.
- Debt declined following repayment of $265.0 of commercial paper used to help fund the CSC acquisition. Interest expense nevertheless rose to $70.2 from $55.4.
- Equifax recorded a $17.0 impairment of its 15% Boa Vista Serviços investment in Brazil. It also recorded a $9.3 restructuring charge related primarily to about 160 position reductions.
- Two non-strategic business lines were sold for $47.5. A reported $18.4 after-tax discontinued-operations gain included an $18.1 tax benefit; it boosted total net income and is not recurring operating income.
Outlook, risks, and contingencies
Management expected modest growth in the U.S. economy and consumer credit in 2014, but anticipated further mortgage-origination declines through the first half of 2014 due to higher interest rates. It aimed to offset mortgage weakness with core non-mortgage growth. 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 over time. Management forecast a 2014 effective tax rate of 36%–37%; these are forward-looking expectations, not guarantees.
- Regulatory and legal: State attorneys general in 32 states were investigating consumer reporting agency practices. Equifax also received a CFPB Civil Investigative Demand in February 2014 concerning marketing and provision of consumer reports, credit scores, and monitoring products. Outcomes were uncertain. The filing also describes ongoing consumer litigation, including bankruptcy-reporting class litigation remanded for further proceedings.
- Data and technology: The business depends on external data providers and secure, continuous IT operations. A data breach, loss of data access, or service disruption could cause regulatory penalties, litigation, financial losses, and reputational harm.
- Market and geographic risks: Mortgage cyclicality, competition and free consumer-information offerings, foreign-exchange movements, and evolving privacy rules may pressure revenue or margins. A proposed Ecuador credit registry could affect local operations; Ecuador was described as less than 3% of anticipated International revenue and operating profit.
- Brazil investment: Further impairment of the Boa Vista investment remained possible if market conditions or execution deteriorated.
- Acquisition: On January 15, 2014, after year-end, Equifax acquired U.K. debt-management company TDX Group for approximately $327 million.
- Controls: Management concluded internal control over financial reporting was effective at December 31, 2013, and the auditor issued an unqualified opinion. However, disclosure controls and procedures were deemed ineffective as of that date because management had not timely assessed the materiality of an acquisition-accounting control deficiency. The deficiency, involving identification and recording of acquired intangible assets, was determined to have been a material weakness existing at December 31, 2012; the filing says it had no material impact on 2012 financial statements and that remediation steps were implemented in 2013. Acquired businesses were excluded from the 2013 controls assessment.
Most important facts for investors to verify
- Whether mortgage-related activity continued to decline as projected, and whether non-mortgage initiatives offset the shortfall.
- How much of revenue and earnings growth reflects acquisitions versus organic growth, and the ongoing amortization and integration costs from CSC.
- Developments, potential costs, or required business changes from the CFPB and state attorneys general investigations and related litigation.
- Evidence that acquisition-accounting control remediation is operating effectively, given the disclosed material weakness and ineffective disclosure controls conclusion.
- Funding, leverage, and integration of the TDX acquisition, alongside the outlook for the Boa Vista investment and any further impairment.
- Cash generation after capital spending, dividends, and acquisition costs; the filing reports operating cash flow and capital expenditures but does not present free cash flow as a defined metric.