Equifax Inc. — Q2 2010 Form 10-Q
Reporting period: Three and six months ended June 30, 2010. Unaudited results; amounts in U.S. dollars unless noted. Comparisons are with the corresponding 2009 periods.
Business context and financial results
Equifax provides consumer and commercial information, analytics, employment and income verification, and related services through five reportable segments. Results below reflect continuing operations unless otherwise noted.
| Metric | Q2 2010 | Q2 2009 | First half 2010 | First half 2009 |
|---|---|---|---|---|
| Operating revenue | $460.7 million | $429.1 million | $903.7 million | $855.6 million |
| Operating income | $105.8 million | $102.0 million | $210.1 million | $198.9 million |
| Operating margin | 23.0% | 23.8% | 23.3% | 23.3% |
| Income from continuing operations attributable to Equifax | $57.7 million | $56.4 million | $111.7 million | $107.2 million |
| Diluted EPS from continuing operations | $0.45 | $0.44 | $0.87 | $0.84 |
| Net income attributable to Equifax, including discontinued operations | $71.3 million | $59.6 million | $128.0 million | $114.0 million |
| Diluted EPS, including discontinued operations | $0.56 | $0.47 | $1.00 | $0.89 |
Q2 revenue rose 7% and first-half revenue rose 6%. Operating income increased 4% and 6%, respectively. Q2 margin declined 0.8 percentage points; management attributed the pressure primarily to higher selling, general and administrative expense and depreciation and amortization. First-half margin was unchanged. Other expense, net was $13.3 million in Q2 and $28.0 million for the first half, higher than the prior year mainly because other income was lower. Effective tax rates were 35.3% for Q2 and 36.4% for the first half, both lower year over year, primarily reflecting a favorable U.K. tax audit settlement.
Cash flow, debt and liquidity
- First-half operating cash flow was $138.9 million, versus $145.6 million in 2009. Capital expenditures were $66.9 million, versus $34.0 million; the increase primarily included the $29.1 million cash purchase of the Atlanta headquarters building.
- Investing activities used $13.9 million, including $14.7 million for acquisitions, partly offset by $66.7 million in proceeds from the APPRO divestiture. Financing activities used $154.3 million, including $64.8 million for share repurchases and debt repayments.
- Cash and cash equivalents were $70.1 million at June 30, down from $103.1 million at year-end 2009. Balance-sheet debt was $1,066.9 million, comprising $87.5 million of short-term debt and current maturities and $979.4 million of long-term debt.
- The company reported $67.1 million of commercial paper outstanding and no borrowings under its $850 million Senior Credit Facility. Available borrowing capacity under the Senior Credit Facility was $781.2 million; the filing reports $790.7 million available across the Senior and Canadian facilities. The Senior Credit Facility matures in July 2011; Equifax intended to renew it and expected higher bank fees and borrowing spreads.
- Leverage ratio was 1.85 against a maximum covenant level of 3.5; Equifax reported compliance with debt covenants. The company said operating cash generation and available credit should fund foreseeable requirements.
Material changes, outlook and risks
- Segment trends: International revenue increased 12% in Q2 and 14% in the first half, aided by foreign exchange and Latin American growth. TALX revenue increased 15% and 12%, respectively, with The Work Number benefiting from verification growth and an acquisition. North America Personal Solutions revenue rose 8% and 5%; North America Commercial Solutions rose 18% in both periods. U.S. Consumer Information Solutions revenue was flat in Q2 but declined 3% for the first half, reflecting weakness in online credit activity, partly offset by consumer financial marketing growth.
- Portfolio changes: Equifax sold APPRO on April 23 for approximately $72 million and recorded a $12.3 million after-tax gain in Q2. It sold substantially all DMS assets on July 1, after quarter-end, for approximately $117 million and expected an after-tax gain of $10–$12 million in Q3. Both businesses were classified as discontinued operations. Their combined revenue was $18.5 million in Q2 2010 and $42.1 million in the first half.
- Outlook: Management said U.S. financial-institution demand had begun to improve and major product and cross-selling initiatives were contributing to growth. It expected year-over-year revenue growth from continuing operations to improve gradually in the second half; no numerical guidance was provided. Management also noted consumer and small-business lending remained soft and expected lending growth to lag the broader economic recovery.
- Other considerations: The filing cites evolving financial regulation as both a source of customer compliance demands and potential opportunity. Equifax faces ordinary-course litigation, including a California credit-reporting class action whose damages settlement had not received final approval. A Canadian tax reassessment for 1995–2000 seeks $8.2–$18.3 million, plus interest and penalties; the company intends to contest it and considers its potential exposure below the asserted claims and not material. The filing says other legal matters are not expected to have a material impact, but outcomes remain uncertain.
- Management stated that disclosure controls were effective and that there had been no material change in internal control over financial reporting during the quarter. Forward-looking statements are subject to risks and uncertainties, and the company disclaimed an obligation to update them except as required by law.
Important facts for investors to verify
- Whether continuing-operations revenue improves in the second half as management expected, particularly given soft lending activity and the expiration of U.S. housing tax incentives.
- How much growth is attributable to underlying demand versus foreign exchange, acquisitions, and discontinued-operation effects; also track the ongoing weakness in U.S. Consumer Information Solutions.
- The final proceeds, escrow release, and realized gain on the APPRO sale, and the recorded outcome of the DMS sale and expected gain.
- Terms and cost of renewing the Senior Credit Facility before its July 2011 maturity, and continued compliance with leverage and other covenants.
- Developments in the California class action and Canadian tax reassessment, including any change in estimated exposure or required accruals.