Equifax Inc. 10-Q Summary: Quarter Ended September 30, 2009
Business Context and Reporting Period
This report covers the quarterly period ended September 30, 2009. Equifax Inc. is a global provider of information solutions, employment verification, and human resources business process outsourcing. The company operates across five segments: U.S. Consumer Information Solutions, International, TALX, North America Personal Solutions, and North America Commercial Solutions. The reporting period reflects continued challenges from a weak global economy, particularly affecting credit-related services, though the company maintained focus on expense management and strategic initiatives.
Key Financial Metrics
| Metric (in millions, except per share) | Q3 2009 | Q3 2008 | 9 Months 2009 | 9 Months 2008 |
|---|---|---|---|---|
| Operating Revenue | $451.9 | $484.1 | $1,360.2 | $1,489.1 |
| Operating Income | $106.3 | $107.2 | $316.2 | $361.1 |
| Operating Margin | 23.5% | 22.2% | 23.2% | 24.2% |
| Net Income (Attributable to Equifax) | $59.7 | $72.3 | $173.7 | $208.8 |
| Diluted EPS | $0.47 | $0.56 | $1.36 | $1.59 |
| Cash from Operating Activities | $123.2 (Q3) | $138.5 (Q3) | $268.8 (9M) | $328.1 (9M) |
| Total Debt (Net) | $1,069.1 | $1,308.1 | $1,069.1 | $1,308.1 |
| Cash and Cash Equivalents | $77.7 | $58.2 | $77.7 | $58.2 |
Material Changes vs. Prior Period
- Revenue Decline: Consolidated operating revenue decreased 7% in Q3 and 9% for the nine months ended September 30, 2009, compared to the prior year. This was driven by global economic weakness reducing demand for credit services and unfavorable foreign exchange rates (impacting revenue by $12.4 million in Q3 and $62.5 million for the nine months).
- Segment Performance:
- Declines: U.S. Consumer Information Solutions (-9%), International (-13%), North America Personal Solutions (-9%), and North America Commercial Solutions (-4%) all saw revenue drops.
- Growth: The TALX segment grew 13% in Q3 and 12% for the nine months, driven by increased employment verification volumes and unemployment claims activity.
- Expense Management: Operating expenses decreased 8% in Q3 and 7% for the nine months. Selling, general, and administrative expenses dropped significantly due to headcount reductions initiated in 2008 and 2009, lower technology outsourcing costs, and the absence of the $14.4 million restructuring charge recorded in Q3 2008.
- Debt Reduction: Total consolidated debt decreased by approximately $239 million year-over-year due to repayments of long-term revolving credit facilities and a shift toward commercial paper.
Guidance, Outlook, Risks, and Unusual Items
- Outlook: Management anticipates continued economic challenges with no meaningful recovery of the global economy expected until 2010. The company is focusing on cost containment, new product innovation, and international expansion to offset revenue declines.
- Unusual Items:
- Restructuring: An $8.4 million restructuring charge was recorded in Q1 2009 related to headcount reductions. This contrasts with a $16.8 million charge in Q3 2008.
- Tax Rate: The effective tax rate increased to 33.6% in Q3 2009 from 19.6% in Q3 2008. The prior year rate was artificially low due to a $14.6 million tax benefit from the expiration of a statute of limitations on Brazilian operations.
- Risks and Contingencies:
- Goodwill Impairment: While no impairment was recorded in the 2009 annual test, the "The Work Number" reporting unit had the smallest fair value excess (approx. 15%). Further deterioration in economic conditions could trigger impairment.
- Legal Proceedings: Ongoing class action litigation regarding bankruptcy discharge reporting and delinquency dates. Settlements are in progress, but outcomes remain uncertain.
- Tax Matters: A dispute with the Canada Revenue Agency regarding tax years 1995–2000 remains unresolved, with potential exposure ranging from $7.9 million to $17.5 million plus interest.
- Subsequent Event: On October 27, 2009, Equifax acquired IXI Corporation for $124 million, financed through its Senior Credit Facility.
Key Facts for Investor Verification
- Liquidity Position: Verify the availability of the $850 million Senior Credit Facility (approx. $566.7 million available as of Sept 30, 2009) and the reliance on commercial paper ($280.7 million outstanding) given credit market volatility.
- Goodwill Sensitivity: Review the sensitivity analysis for the "The Work Number" and "Talent Management Services" reporting units, which have the lowest fair value excesses and are most vulnerable to further economic downturns.
- Debt Covenants: Confirm compliance with the maximum leverage ratio covenant of 3.5x (current ratio is 1.82) and monitor credit rating stability (BBB+/Baa1) to avoid increased borrowing costs.
- Headcount and Restructuring: Assess the impact of ongoing cost-cutting measures and the completion of severance payments related to the 2009 restructuring charge.
- Foreign Exchange Impact: Monitor the continued negative impact of foreign currency translation on the International segment, which accounted for a significant portion of the revenue decline.