Equifax Inc. — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020; balance-sheet amounts are as of September 30, 2020. Comparisons are with the corresponding 2019 periods. Figures are in U.S. dollars.
Business context and financial performance
Equifax provides credit and other information, analytics, verification, payroll-related and consumer services. Third-quarter growth was led by U.S. mortgage activity and Workforce Solutions, while COVID-19 weighed on international and several non-mortgage markets.
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Operating revenue | $1,068.3 million | $875.7 million | $3,009.1 million | $2,601.8 million |
| Revenue growth | 22% | 5% | 16% | 1% |
| Operating income (loss) | $204.4 million | $121.6 million | $507.2 million | $(382.5) million |
| Operating margin | 19.1% | 13.9% | 16.9% | (14.7)% |
| Net income (loss) attributable to Equifax | $224.2 million | $81.1 million | $432.7 million | $(408.0) million |
| Diluted EPS | $1.82 | $0.66 | $3.53 | $(3.35) |
Q3 operating margin expanded 5.2 percentage points. The nine-month comparison is strongly affected by $701.3 million of 2019 cybersecurity-related legal accruals that did not recur in 2020. Q3 other income included a $129.9 million unrealized gain on the Brazil investment; nine-month other income also included a $32.9 million gain on the India investment. These gains increased reported earnings and should be distinguished from operating performance.
Revenue by segment
| Segment | Q3 revenue | Change year over year | Nine-month revenue | Change year over year |
|---|---|---|---|---|
| U.S. Information Solutions | $386.3 million | +22% | $1,095.1 million | +16% |
| Workforce Solutions | $376.8 million | +57% | $1,031.4 million | +48% |
| International | $218.0 million | (5)% | $614.6 million | (10)% |
| Global Consumer Solutions | $87.2 million | (2)% | $268.0 million | (1)% |
Mortgage-related volume supported USIS and Verification Services; increased unemployment claims supported Workforce Solutions Employer Services. International weakness reflected COVID-19 impacts across markets, with currency also reducing nine-month revenue. Workforce Solutions revenue included strong unemployment claims management growth, which management linked to the pandemic’s economic effects.
Cash flow, debt and liquidity
- Cash flow, nine months: Operating activities provided $649.0 million, versus $83.1 million in 2019. Investing activities used $380.9 million; financing activities provided $865.3 million. Capital expenditures were $309.5 million.
- Cash: $1,535.6 million at September 30, compared with $401.3 million at December 31, 2019.
- Debt: Total debt carrying amount was $4,403.4 million, including $1,102.1 million classified as short-term/current maturities and $3,275.3 million of long-term debt, net. Debt increased from $3,403.1 million at year-end 2019, principally following $1.0 billion of senior note issuance in April.
- Available borrowing: $1.1 billion under the revolver, with no revolver or commercial-paper borrowings outstanding. The receivables facility had $225 million available; Equifax said it intended to terminate it in Q4 2020. Management also cited approximately $1.3 billion of available borrowing capacity across the revolver and receivables facility.
- Capital returns: Dividends paid were $142.1 million, or $1.17 per share, in the first nine months. No shares were repurchased during that period; $590.1 million remained authorized.
Outlook, risks and unusual items
- Equifax provided no specific quantitative revenue or earnings guidance. Management said COVID-19 would continue to adversely affect the business, but the severity and duration were uncertain; it could not assure revenue growth in Q4.
- U.S. results benefited from strong mortgage demand and unemployment claims activity, while revenue declined in most other U.S. verticals and across International markets. Management said international performance improved from Q2 levels.
- The company continued its EFX2020 cloud, technology, data and security transformation, with significant expenses and capital expenditures expected through the remainder of 2020 at levels similar to 2019. Cost controls included limiting hiring, contracted services, travel and discretionary spending.
- Cybersecurity incident matters remain material. The company had accrued $800.9 million in 2019, net of insurance recoveries, for specified proceedings and investigations, but said additional losses above the accrual were reasonably possible and could not be estimated. It had paid $439.3 million in related settlements through September 30. A further $346.7 million payment to the consumer restitution fund was contingent on final adjudication or dismissal of appeals; an additional contribution of up to $125 million may apply if fund conditions are met.
- Appeals remained pending to the consumer settlement approval; the filing cautioned that reversal could prevent settlement on acceptable terms. Other litigation and investigations remained, including Canadian class actions and a U.K. regulatory investigation. A financial-institutions settlement received court approval on October 22, 2020, after quarter-end.
- Annual goodwill testing found no impairment, but Asia Pacific’s fair value cushion was less than 5%; management identified it as at risk of possible future impairment, dependent on economic recovery and execution of plans.
- The company reported compliance with debt covenants and effective disclosure controls. Credit ratings were S&P BBB with a negative outlook and Moody’s Baa2 with a stable outlook.
Important facts for investors to verify
- How much of earnings growth reflects recurring operations versus the Brazil and India investment gains and the absence of prior-year cybersecurity accruals?
- What is the timing and ultimate cash cost of cybersecurity settlements, appeals, and unresolved claims, including potential amounts beyond recorded accruals?
- Whether mortgage-driven and unemployment-related revenue remains durable as COVID-19 conditions and economic activity change, and how international markets recover.
- Debt maturities, refinancing plans and covenant headroom, particularly given the $1.102 billion current portion of debt and the amended leverage limits.
- Whether Asia Pacific performance and valuation assumptions support the goodwill carrying value, and whether transformation spending delivers expected benefits.