Equifax Inc. 10-Q Summary: Quarter Ended June 30, 2009
Business Context and Reporting Period
This report covers the quarterly period ended June 30, 2009, for Equifax Inc., a global provider of information solutions, employment verification, and human resources business process outsourcing. The company operates in five reportable segments: U.S. Consumer Information Solutions, International, TALX, North America Personal Solutions, and North America Commercial Solutions. The reporting period reflects the impact of a weak global economy and diminished demand for credit-related services.
Key Financial Metrics
| Metric | Three Months Ended June 30, 2009 | Six Months Ended June 30, 2009 |
|---|---|---|
| Operating Revenue | $455.4 million | $908.3 million |
| Operating Income | $107.2 million | $209.9 million |
| Operating Margin | 23.5% | 23.1% |
| Net Income (Attributable to Equifax) | $59.6 million | $114.0 million |
| Diluted Earnings Per Share | $0.47 | $0.89 |
| Cash Provided by Operating Activities | $101.1 million (QTD) | $145.6 million (YTD) |
| Total Debt (Gross) | $1,152.5 million | $1,152.5 million |
| Cash and Cash Equivalents | $63.6 million | $63.6 million |
| Available Credit Facilities | $501.9 million | $501.9 million |
Material Changes vs. Prior Period
- Revenue Decline: Consolidated operating revenue decreased 9% in the quarter and 10% year-to-date compared to 2008. This was driven by global economic weakness and unfavorable foreign exchange rates (which negatively impacted revenue by $22.0 million in the quarter and $50.1 million YTD).
- Segment Performance:
- Declines: U.S. Consumer Information Solutions (-8% QTD), International (-24% QTD), North America Personal Solutions (-10% QTD), and North America Commercial Solutions (-11% QTD) all saw revenue drops due to reduced credit origination and marketing spend.
- Growth: The TALX segment grew 12% QTD and 11% YTD, driven by increased employment verification volume (The Work Number) and unemployment claims activity (Tax and Talent Management).
- Expense Management: Operating expenses decreased 7% QTD and 7% YTD. Cost of services and SG&A declined due to foreign currency translation, renegotiated outsourcing contracts, and headcount reductions initiated in late 2008 and early 2009.
- Restructuring: An $8.4 million restructuring charge was recorded in the first quarter of 2009 related to approximately 300 headcount reductions.
- Debt Reduction: Total debt decreased from $1,217.3 million at year-end 2008 to $1,152.5 million. The company increased its use of commercial paper ($311.1 million outstanding) while reducing borrowings under its long-term revolving credit facility.
Guidance, Outlook, and Risks
- Outlook: Management does not expect consolidated revenue or cash flow to improve meaningfully until 2010. The company continues to focus on expense reduction and maintaining operating margins amidst economic weakness.
- Liquidity: The company maintains a strong financial position with $501.9 million available under committed credit facilities. The Senior Credit Facility ($850 million) expires in July 2011 and is expected to be renewed, though borrowing spreads may increase due to market conditions.
- Capital Allocation: Share repurchases slowed significantly ($9.1 million YTD vs. $81.1 million in 2008). Approximately $149.1 million remains authorized for future repurchases. Dividends remained stable at $0.08 per share for the six-month period.
- Risks and Contingencies:
- Legal Proceedings: Several class action lawsuits are ongoing, including the California Bankruptcy Litigation and Gillespie Litigation. A tentative settlement was reached in July 2009 for the Gillespie matter.
- Tax Matters: The Canada Revenue Agency has asserted additional tax liabilities for 1995–2000 ranging from $7.4 million to $16.5 million plus interest. Equifax intends to contest these claims.
- Goodwill Impairment: While no impairment was recorded, the company notes that the fair value of reporting units is sensitive to changes in discount rates and cash flow projections. The Work Number unit has the lowest excess of fair value over carrying value (44%).
Investor Verification Checklist
- Verify the sustainability of revenue growth in the TALX segment versus the continued decline in core credit reporting segments.
- Monitor the resolution of the Canada Revenue Agency tax dispute and potential impact on future earnings.
- Assess the status of ongoing class action litigation settlements and their final financial impact.
- Review the renewal terms of the $850 million Senior Credit Facility due in July 2011, specifically regarding interest rate spreads and covenants.
- Track the company's ability to maintain operating margins as fixed costs are leveraged against lower revenue volumes.