Equifax Inc. — Q2 2014 Form 10-Q
Reporting period: Three and six months ended June 30, 2014. Equifax provides consumer and commercial information, analytics, verification, and related services. Amounts below are in U.S. dollars; financial figures are in millions except per-share data.
Financial performance
| Metric | Q2 2014 | Q2 2013 | First half 2014 | First half 2013 |
|---|---|---|---|---|
| Revenue | $613.9 | $586.9 | $1,198.4 | $1,153.4 |
| Operating income | $167.4 | $158.1 | $319.3 | $307.1 |
| Operating margin | 27.3% | 26.9% | 26.6% | 26.6% |
| Net income attributable to Equifax | $92.8 | $90.5 | $176.7 | $191.6 |
| Diluted EPS | $0.75 | $0.73 | $1.42 | $1.55 |
| Cash provided by operating activities | Not separately stated | Not separately stated | $217.8 | $202.8 |
Q2 revenue rose 5% and operating income 6%; diluted EPS increased 2%. First-half revenue and operating income grew 4% each. First-half continuing-operations income attributable to Equifax was $176.7 million versus $172.6 million, up 2%. Total attributable net income and EPS were lower year over year because 2013 included $19.0 million of discontinued-operation income, including a divestiture gain.
First-half capital expenditures were $37.7 million. Investing cash outflow was $367.6 million, including $333.7 million for acquisitions. Financing cash inflow was $10.5 million, including $131.4 million of net short-term borrowing, offset in part by $73.4 million of share repurchases and $61.2 million of dividends paid to Equifax shareholders.
Liquidity, debt, and balance sheet
- At June 30, cash and equivalents were $91.7 million, down from $235.9 million at year-end 2013. Current assets were $554.2 million and current liabilities were $759.8 million.
- Total debt was approximately $1.555 billion, including $131.4 million of commercial paper; $409.8 million was classified as short-term debt and current maturities. Long-term debt, net, was $1.146 billion.
- Equifax had $617.2 million available under its $750 million revolving credit facility, which expires in December 2017. The company reported a 1.83 leverage ratio against a maximum covenant of 3.5 and compliance with its debt covenants.
- Management said operating cash generation and available facilities were expected to fund anticipated needs for the foreseeable future. The company planned to repay its $275 million 4.45% notes due December 2014 with commercial-paper borrowings.
Material changes and segment trends
- International revenue increased 18% in Q2 and 17% for the first half, primarily reflecting the TDX acquisition and other acquisitions; international operating income declined 10% and 13%, respectively, as acquisition-related amortization and inflation pressures reduced margins.
- U.S. Consumer Information Solutions revenue grew 2% in Q2 and 1% in the first half. Core non-mortgage products grew, while mortgage solutions revenue fell 15% in Q2 and 16% for the first half as refinancing activity declined.
- Workforce Solutions revenue fell 3% in both periods, mainly due to lower mortgage-related verification activity; operating income nevertheless increased 6% in Q2 and 5% in the first half.
- North America Personal Solutions revenue rose 5% in both periods. North America Commercial Solutions revenue grew 1% in both periods.
- In January, Equifax acquired U.K.-based TDX Group for $322.8 million and also acquired Forseva, a credit-management software provider. TDX results were included in International; Forseva results in North America Commercial Solutions.
Outlook, risks, and unusual items
- Management expected modest U.S. economic and consumer-credit growth for the remainder of 2014. Mortgage origination activity was expected to continue declining versus 2013, but at a much lower rate than in the first half. International conditions remained challenging, with foreign-exchange weakness reducing reported revenue and profit.
- Longer term, management targeted average organic revenue growth of 6%–8%, plus 1%–2% from strategic acquisitions, and expected EPS to grow somewhat faster than revenue. These are forward-looking expectations, not assurances.
- Foreign exchange reduced consolidated revenue by $6.3 million in Q2 and $16.1 million in the first half. The Argentine peso was a notable source of currency pressure; related foreign-exchange losses also contributed to higher other expense.
- The effective tax rate was 37.2% in Q2 versus 35.9% a year earlier, reflecting higher state taxes and fewer discrete federal tax benefits; the first-half rate was 36.1% versus 35.9%.
- Equifax disclosed ongoing consumer-reporting litigation, a multistate attorneys general investigation, and a CFPB investigation concerning marketing and provision of consumer reports, scores, and monitoring products. The company said it was cooperating and could not predict outcomes. Recorded legal accruals were not material, but outcomes remain uncertain.
- On July 24, 2014, Equifax announced a reporting-segment reorganization effective Q3: U.S. Commercial Solutions would combine with U.S. Consumer Information Solutions, and Canadian Commercial Solutions with Canada International operations.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. No material change in disclosed risk factors or market-risk exposure was reported.
Important facts for investors to verify
- How much of International growth reflects TDX and other acquisitions versus organic growth, and whether acquired operations can improve margins as amortization costs continue.
- The trajectory of mortgage-related revenue and the strength of non-mortgage growth, especially in U.S. consumer and workforce businesses.
- Commercial-paper refinancing of the $275 million notes due December 2014, funding costs, and liquidity after acquisition spending and repurchases.
- Developments and potential financial consequences of the CFPB, state attorneys general, and bankruptcy-related matters.
- Whether the long-term revenue-growth targets remain achievable amid economic, currency, and regulatory uncertainty.