Equifax Inc. — Q2 2011 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2011. Unaudited consolidated results; amounts are in U.S. dollars. Equifax provides consumer and commercial information, analytics, employment verification, and related services through five reportable segments.
Financial performance
| Metric | Q2 2011 | Q2 2010 | First half 2011 | First half 2010 |
|---|---|---|---|---|
| Revenue | $487.1 million | $460.7 million | $959.7 million | $903.7 million |
| Operating income | $114.6 million | $105.8 million | $223.7 million | $210.1 million |
| Operating margin | 23.5% | 23.0% | 23.3% | 23.3% |
| Income from continuing operations attributable to Equifax | $34.5 million | $57.7 million | $91.8 million | $111.7 million |
| Diluted EPS from continuing operations | $0.28 | $0.45 | $0.74 | $0.87 |
| Cash from operating activities | $123.9 million | $101.2 million | $147.0 million | $138.9 million |
Revenue grew 6% in both the quarter and first half. Q2 operating income increased 8%; first-half operating income rose 6%. Net income attributable to Equifax fell 52% in Q2 to $34.5 million and 28% for the first half to $91.8 million. The prior-year periods included discontinued operations, including a $12.3 million after-tax gain on the sale of APPRO.
Q2 revenue grew in U.S. Consumer Information Solutions (5%), International (11%), North America Personal Solutions (12%), and North America Commercial Solutions (12%); TALX revenue declined 3%. International revenue benefited from currency translation: the company reported a $9.1 million favorable effect in Q2 and $13.7 million year to date. TALX cited weaker mortgage-related verifications and talent-management demand.
For the first six months, capital expenditures were $43.9 million, down from $66.9 million, largely because 2010 included the $29.1 million Atlanta headquarters purchase. Investing cash outflow was $74.8 million; financing cash outflow was $83.9 million. Cash declined $10.7 million from year-end to $108.7 million.
Debt and liquidity
At June 30, cash was $108.7 million and current assets were $436.5 million against current liabilities of $298.7 million. The balance sheet shows $17.6 million of short-term debt and current maturities and $963.9 million of long-term debt, totaling $981.5 million on that presentation. The debt schedule separately reports $970.1 million of total debt before the stated discounts and fair-value adjustments. Management reported $498.4 million of available capacity under its $500 million revolving facility, no outstanding facility borrowings or commercial paper, and a leverage ratio of 1.63 versus a 3.5 maximum covenant.
The company extended its revolving facility maturity to February 2015 and reduced its capacity from $850 million to $500 million; the commercial paper program was also reduced to $500 million. Debt declined from the prior-year quarter-end level reported in MD&A. Approximately 70% of debt was fixed-rate and 30% effectively variable-rate; the reported rate on variable-rate debt was 2.0%. The company said it was in compliance with debt covenants.
Material transaction, outlook, and risks
On May 31, Equifax completed the merger of its Brazilian business with Boa Vista Serviços S.A. (BVS) in exchange for a 15% interest, which is not consolidated. The investment was valued at $82.3 million. Equifax wrote off $33.2 million of goodwill and $27.0 million of cumulative currency translation adjustments. The transaction note reports a $10.3 million pretax loss and $17.5 million of tax expense; MD&A also attributes a $27.8 million loss to the transaction when explaining earnings and cash-flow comparisons. These disclosures should be reconciled before relying on a single transaction-impact figure.
Equifax may be required to provide BVS funding: up to $100 million for mutually agreed strategic acquisitions during an initial 90-day period, and later funding subject to stated limits and terms. The company also retained certain contingent liabilities. The transaction contributed substantially to the higher effective tax rate: 59.4% in Q2 versus 35.3% a year earlier and 48.4% for the first half versus 36.4%.
Management described lending activity as stabilized but not showing strong growth, and expected only modest credit-economy improvement in 2011, with no measurable contribution to organic growth from that recovery. It expected organic growth from newer products and customer-segment expansion. Mortgage demand, regulation, competition, foreign exchange, and continued weakness in some TALX services were identified as relevant operating conditions. No quantified earnings or revenue guidance was provided.
Legal proceedings arise in the ordinary course of business; management did not expect the other matters described to materially affect financial condition or results, while noting outcomes cannot be predicted with certainty. A California bankruptcy-related class settlement received final court approval on July 20, 2011. The CRA tax claim was settled for C$1.1 million, with a net refund of C$9.7 million of deposit and accrued interest. Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Key facts for investors to verify
- Reconcile the Brazilian transaction’s reported $10.3 million pretax loss, $17.5 million tax expense, and MD&A’s $27.8 million loss reference, including the effects of currency translation and goodwill write-off.
- Assess whether revenue growth excluding favorable foreign-exchange effects and acquisitions supports management’s expectation of organic growth from new products.
- Track TALX revenue and margins, particularly mortgage-related verifications, government hiring, and talent-management services.
- Review the potential BVS funding commitments, retained liabilities, and the terms and timing under which Equifax could be required to provide funds.
- Confirm debt figures across the balance sheet and debt schedule, and monitor available revolver capacity, leverage-covenant compliance, and cash uses for dividends and repurchases.