Equifax Inc. — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013; unaudited. Comparisons are with the three months ended March 31, 2012 unless otherwise noted. Equifax provides consumer and commercial information solutions, employment and income verification, and related services.
Financial performance
| Metric | Q1 2013 | Q1 2012 | Change |
|---|---|---|---|
| Operating revenue | $566.5 million | $505.9 million | +12% |
| Operating income | $149.0 million | $128.3 million | +16% |
| Operating margin | 26.3% | 25.4% | +0.9 percentage points |
| Income from continuing operations attributable to Equifax | $82.1 million | $71.1 million | +15% |
| Net income attributable to Equifax | $101.1 million | $71.5 million | +41% |
| Diluted EPS | $0.82 | $0.58 | +41% |
| Cash provided by operating activities | $66.3 million | $48.3 million | +$18.0 million |
| Capital expenditures | $18.7 million | $20.2 million | -$1.5 million |
Continuing-operations diluted EPS was $0.67, versus $0.58. The effective tax rate was 36.0%, compared with 36.7%. Interest expense rose to $17.7 million from $13.8 million; management attributed the increase primarily to the $500 million of 3.30% senior notes issued in December 2012. Average cost of debt was 4.2%, versus 5.6%.
Segment revenue
- U.S. Consumer Information Solutions: $245.1 million, up 17%; operating income $91.9 million.
- International: $123.7 million, up 2%; operating income $34.7 million, down from $38.5 million.
- Workforce Solutions: $123.7 million, up 14%; operating income $37.4 million, up 43%.
- North America Personal Solutions: $51.1 million, up 14%; operating income $14.5 million.
- North America Commercial Solutions: $22.9 million, up 10%; operating income $4.9 million.
Liquidity, cash flow and debt
At March 31, 2013, cash and cash equivalents were $107.6 million, down from $146.8 million at December 31, 2012. Current assets were $484.8 million and current liabilities $449.7 million. Operating cash flow was $66.3 million; investing activities provided $25.0 million, including $43.7 million of divestiture proceeds; financing activities used $128.4 million, including $106.6 million of net short-term debt repayments and $26.5 million of dividends to Equifax shareholders.
Total debt reported in the debt note was $1,613.9 million, including $160.0 million of commercial paper. Long-term debt, net, was $1,445.6 million; short-term debt and current maturities were $176.7 million. The $750 million revolving facility had no borrowings and $588.6 million available. The company reported a leverage ratio of 1.95 against a maximum covenant ratio of 3.5 and said it was in compliance with its debt covenants. About 73% of debt was fixed-rate and 27% effectively variable-rate.
Material changes and unusual items
- Revenue growth reflected the late-2012 CSC Credit Services acquisition, strategic growth initiatives, and strong U.S. mortgage refinancing activity. Foreign exchange reduced reported revenue by $2.4 million.
- Equifax sold Equifax Settlement Services and Talent Management Services for total consideration of $47.5 million; $3.5 million was held in escrow. The businesses’ historical results were classified as discontinued operations. Discontinued operations contributed $19.0 million net of tax in Q1 2013, versus $0.4 million a year earlier. The filing describes an $18.4 million disposal gain and a significant related tax benefit; investors should review the detailed tax and gain presentation.
- CSC-related amortization and transition costs weighed on U.S. Consumer Information Solutions’ margin, which declined to 37.5% from 38.7%. International margin fell to 28.1% from 31.8%, reflecting investment in growth initiatives. Workforce Solutions’ margin rose to 30.3% from 24.1%, principally from revenue growth in higher-fixed-cost products.
- Goodwill declined to $2,253.5 million from $2,290.4 million, mainly reflecting businesses sold and foreign currency translation. Purchased intangible assets, net, declined to $945.7 million from $987.7 million.
Outlook, risks and contingencies
Management expected U.S. mortgage refinancing activity to remain strong through the first half of 2013 and trend down in the second half, with modest economic growth in most served markets. It reiterated a long-term average organic revenue growth objective of 6%–8%, plus 1%–2% from strategic acquisitions, and expected EPS to grow somewhat faster than revenue. For 2013, management expected the CSC Credit Services acquisition to more than offset the anticipated decline in U.S. mortgage volumes. These are forward-looking expectations, not guarantees.
Risks noted include economic, political and fiscal conditions in served markets; mortgage-volume changes; foreign exchange; credit ratings and access to commercial paper markets; and litigation. The filing reports ordinary-course legal proceedings and says the California bankruptcy litigation was remanded for further proceedings by the Ninth Circuit on April 22, 2013. Management did not expect other pending matters, individually or in aggregate, to materially affect the financial statements, while noting outcomes remain uncertain. No material changes to previously disclosed risk factors or market-risk exposure were reported. Disclosure controls were concluded to be effective.
Key investor verification points
- Separate recurring operating performance from discontinued-operations income and verify the disposal gain and tax-benefit amounts against the detailed statements and notes.
- Assess how much of revenue growth came from the CSC acquisition and strong refinancing activity, and how results may change as mortgage activity moderates.
- Review segment margin trends, especially the declines in International and U.S. Consumer Information Solutions, and the sustainability of Workforce Solutions’ margin improvement.
- Reconcile reported debt measures, including the debt-note total and management’s separate discussion of consolidated debt; monitor commercial paper, the 2014 maturities, facility availability and covenant headroom.
- Track cash conversion, the use of divestiture proceeds, acquisition integration costs, and the effects of litigation and foreign exchange.