Equifax Inc. — Q1 2010 Form 10-Q
Reporting period: Three months ended March 31, 2010; financial statements are unaudited. Equifax provides consumer and commercial information, analytics, identity and employment verification, and related services across five reportable segments.
Financial performance
| Metric | Q1 2010 | Q1 2009 | Change |
|---|---|---|---|
| Operating revenue | $461.3 million | $446.6 million | +3% |
| Operating income | $107.7 million | $101.0 million | +7% |
| Operating margin | 23.3% | 22.6% | +0.7 percentage points |
| Income from continuing operations attributable to Equifax | $56.1 million | $53.3 million | +5% |
| Net income attributable to Equifax | $56.7 million | $54.4 million | +4% |
| Diluted EPS | $0.44 | $0.43 | +2%; continuing-operations EPS rose 5% to $0.44 |
| Cash from operating activities | $37.7 million | $44.5 million | Down $6.8 million |
| Capital expenditures | $50.0 million | $15.0 million | Up $35.0 million |
Operating cash flow less capital expenditures was negative $12.3 million, versus positive $29.5 million a year earlier. The filing attributes higher 2010 capital spending largely to the $29.1 million cash purchase of Equifax’s Atlanta headquarters building. Lower operating cash flow primarily reflected $5.0 million of additional pension contributions and working-capital changes.
At March 31, 2010, cash and cash equivalents were $77.1 million, down from $103.1 million at year-end. Current assets were $446.8 million and current liabilities $429.4 million. Debt was approximately $1.14 billion, including $157.2 million of short-term debt and current maturities and $990.6 million of long-term debt. The company reported $137.7 million of commercial paper outstanding and $708.6 million available under its $850 million senior revolving facility. Its leverage ratio was 2.02 against a 3.5 covenant maximum; Equifax reported compliance with its debt covenants.
Material changes and segment results
- Revenue growth included a favorable $14.8 million foreign-exchange effect. The U.S. Consumer Information Solutions (USCIS) segment declined 6% to $191.4 million, while International rose 15% to $116.2 million, TALX rose 8% to $95.3 million, North America Personal Solutions rose 3% to $39.7 million, and North America Commercial Solutions rose 18% to $18.7 million.
- USCIS operating income fell 14% to $63.5 million and margin declined to 33.1%, primarily due to continued weakness in U.S. credit and lending and lower mortgage application activity. International operating income was nearly flat at $28.7 million, with margin down to 24.7%, partly reflecting weaker high-margin online volumes.
- TALX operating income increased 14% to $21.5 million, supported by The Work Number growth and operating efficiencies. Personal Solutions operating income increased to $10.0 million from $6.0 million; Commercial Solutions rose to $4.4 million from $2.3 million.
- Operating expenses increased 2%. Cost of services rose 7%, partly from foreign exchange and acquired businesses; SG&A fell 8%, largely because the prior-year quarter included an $8.4 million restructuring charge. The 2010 operating-margin comparison also benefited from that nonrecurring charge not repeating.
- Other expense, net, increased to $14.7 million from $11.9 million. Interest expense was essentially flat; prior-year other income included gains on debt repurchase and a litigation settlement.
Outlook, risks and unusual items
- Management expected revenue growth to improve gradually during 2010, with operating results stable at current levels in the first half and some performance improvement in the second half, based on its outlook and then-current foreign-exchange rates. It cited potential increased demand from credit-card issuers following February 2010 regulatory changes and renewed lending activity; this is not a quantified earnings forecast.
- Management described consumer and small-business lending as soft and expected consumer lending recovery to lag broader economic recovery. It emphasized product innovation, analytics, data assets, international expansion, and cost-management initiatives.
- On April 23, 2010, after quarter-end, Equifax sold its APPRO loan-origination software business for approximately $72 million. The business was classified as discontinued operations; management expected an approximately $12 million after-tax gain in Q2 2010. Q1 APPRO revenue was $5.3 million versus $6.3 million a year earlier.
- The $850 million senior credit facility was scheduled to expire in July 2011; Equifax intended to renew it and anticipated higher bank fees and borrowing spreads. The Canadian C$20 million facility was scheduled to expire in June 2010.
- Risks and contingencies include sensitivity to lending and mortgage activity, foreign-exchange movements, credit-market access and refinancing costs, litigation, and tax matters. A Canadian tax reassessment for 1995–2000 asserted $8.4–$18.6 million plus interest and penalties; Equifax said it would contest the matter and believed exposure was not material. Management did not expect other legal matters, individually or collectively, to materially affect results, while noting outcomes are uncertain.
Important facts for investors to verify
- Whether the anticipated second-half improvement materialized, particularly in USCIS, mortgage-related activity, and International margins.
- How much reported revenue growth depended on foreign exchange and acquisitions versus underlying local-currency growth.
- Whether operating cash generation recovers after elevated capital spending and pension contributions; confirm the timing and remaining cost of planned investment.
- The outcome of the APPRO sale and whether the expected after-tax gain was recorded in Q2 2010.
- Renewal terms and availability of the senior and Canadian credit facilities, and developments in the Canadian tax reassessment and disclosed litigation.