Equifax Inc. — Q2 2020 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2020. Unaudited results are compared with the corresponding 2019 periods. Equifax provides data, analytics, information solutions, workforce services, and consumer products.
Financial performance
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Revenue | $982.8 million | $880.0 million | $1,940.8 million | $1,726.1 million |
| Operating income (loss) | $166.8 million | $113.8 million | $302.7 million | $(504.0) million |
| Operating margin | 17.0% | 12.9% | 15.6% | (29.2)% |
| Net income (loss) attributable to Equifax | $95.9 million | $66.8 million | $208.5 million | $(489.1) million |
| Diluted EPS | $0.78 | $0.55 | $1.70 | $(4.02) |
- Q2 revenue increased 12%; growth was led by Workforce Solutions, up 53%, and U.S. Information Solutions, up 10%. International revenue fell 21%, while Global Consumer Solutions declined 5%.
- Q2 operating income increased 47%. Workforce Solutions operating margin rose to 49.4%; U.S. Information Solutions margin declined to 30.9%, International recorded a 3.4% operating loss margin, and Global Consumer Solutions margin fell to 9.3%.
- For the first half, the return to profit from the prior-year loss principally reflects the absence of $701.3 million of 2019 cybersecurity-related legal accruals. The 2020 period also included a $32.9 million gain from a fair-value adjustment of an India equity investment.
- Q2 interest expense was $36.6 million versus $27.6 million. Six-month interest expense was $67.3 million versus $54.3 million, reflecting additional debt issuance.
Cash flow, balance sheet and debt
- For the six months, operating cash flow was $282.0 million, compared with $248.0 million. Capital expenditure cash outflow was $192.8 million, implying operating cash flow less capital expenditures of approximately $89.2 million.
- Cash and cash equivalents were $1.347 billion at June 30, 2020, up from $401.3 million at year-end 2019. Total current assets were $2.105 billion and current liabilities $1.656 billion.
- Total debt was $4.404 billion, including $503.7 million of short-term debt and current maturities; long-term debt, net, was $3.872 billion. Debt less reported cash was approximately $3.056 billion.
- In April, Equifax issued $1.0 billion of senior notes—$400 million at 2.6% due 2025 and $600 million at 3.1% due 2030. Proceeds repaid Receivables Facility borrowings, with remaining funds intended for general corporate purposes.
- At quarter-end, the company reported $1.1 billion available under its revolver and $225 million available under its receivables facility; neither facility had borrowings outstanding. It was in compliance with debt covenants. The revolver’s maximum leverage ratio was temporarily increased through 2021.
- Equifax paid $94.6 million in shareholder dividends during the first half and did not repurchase shares. The quarterly dividend was $0.39 per share.
Outlook, risks and unusual items
- Management said COVID-19 effects began in March. U.S. mortgage activity and unemployment-claims services supported Q2 growth, while most other U.S. verticals declined and all international regions experienced revenue declines. Declines were most pronounced in April and generally eased in May and June.
- Management expects the pandemic to continue adversely affecting the business, but said the duration and severity are highly uncertain and gave no numerical revenue or earnings guidance. It cautioned that first-half revenue growth does not assure growth in the second half.
- The company limited hiring, contractor additions, travel and discretionary spending. It expected significant technology transformation, security and consumer-support expense and capital spending to continue in the second half at levels similar to 2019. Management said prolonged disruption could increase impairment, credit-loss allowance or restructuring risk.
- Cybersecurity incident matters remain a material contingency. Equifax had paid $439.3 million in related legal settlements through June 30. It expected to pay a further $346.7 million to the consumer restitution fund after final adjudication or dismissal of appeals; timing was uncertain. The consumer settlement also permits up to an additional $125 million for certain eligible costs if the fund is exhausted. The company said losses above its accrual could be material, but it could not estimate the additional exposure.
- Appeals remain pending in the U.S. consumer settlement; the financial-institutions settlement had preliminary, but not final, court approval. Other consumer litigation and government investigations also remain, including a U.K. Financial Conduct Authority investigation.
- The company reported that its work-from-home and return-to-office protocols had not materially adversely affected controls, financial reporting systems or operations. Management continued its EFX2020 cloud, data and security transformation.
Important facts for investors to verify
- How pandemic-related demand, especially U.S. mortgage and unemployment-claims activity, evolves and whether international and other U.S. markets recover.
- Whether pending appeals and court approvals affect the timing or cost of cybersecurity settlements, and whether additional losses beyond recorded accruals arise.
- Execution, expense and capital requirements of the technology and security transformation, and their effects on margins and cash generation.
- Debt maturities, covenant headroom and liquidity after settlement payments; the filing reports $503.7 million of current debt maturities and temporary leverage covenant relief.
- The effect of prior-year legal accruals and the India investment gain when comparing reported earnings with underlying operating trends.