Equifax Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; compared with the three months ended March 31, 2019. Equifax provides data, analytics, information solutions, and workforce-related services. The filing was signed April 21, 2020.
Financial performance
| Metric | Q1 2020 | Q1 2019 |
|---|---|---|
| Revenue | $957.9 million | $846.1 million |
| Operating income (loss) | $135.9 million | $(617.9) million |
| Operating margin | 14.2% | (73.0)% |
| Net income (loss) attributable to Equifax | $112.6 million | $(555.9) million |
| Diluted EPS | $0.92 | $(4.57) |
| Cash from operating activities | $30.8 million | $31.0 million |
| Capital expenditures, cash basis | $88.0 million | $114.8 million |
Revenue grew 13% year over year, including a $16.0 million adverse foreign-exchange effect. Operating results improved substantially, principally because the prior-year quarter included a $690 million cybersecurity-related legal accrual that did not recur. Q1 2020 also included $45.3 million of other income, primarily a $32.9 million fair-value gain on the India equity investment and foreign-currency gains. These items make the year-over-year earnings comparison unusually favorable.
Revenue by segment: U.S. Information Solutions (USIS) rose 15% to $343.2 million; Workforce Solutions rose 32% to $301.6 million; International fell 4% to $216.0 million as reported, though local-currency revenue grew 3%; and Global Consumer Solutions rose 3% to $97.1 million. Segment operating margins were 31.4% for USIS, 44.3% for Workforce Solutions, 7.1% for International, and 13.5% for Global Consumer Solutions.
Financial position and liquidity
- Cash and cash equivalents were $369.9 million at March 31, 2020, down from $401.3 million at year-end 2019.
- Total debt was $3.528 billion gross, with $3.508 billion reported net of discounts and issuance costs; long-term debt, net, was $3.505 billion. Debt increased during the quarter, including a $125 million draw under the Receivables Facility. Average cost of debt was 3.6%; 88% of debt was fixed-rate.
- Revolver availability was $1.1 billion, and Receivables Facility availability was $100 million. The company reported compliance with debt covenants at quarter-end.
- Cash flow was $30.8 million from operations, $(136.1) million from investing, and $92.7 million from financing. Cash declined $31.4 million during the quarter.
- Equifax paid $47.3 million in shareholder dividends, or $0.39 per share, and made no share repurchases under its authorization.
Changes, outlook, and material matters
- COVID-19: Revenue trends weakened materially in the second half of March. The company reported declines in many markets, including financial services, automotive, telecommunications, and international markets; mortgage activity and unemployment-cost management were notable areas of strength. Management expected negative revenue impacts in Q2 and beyond until economic conditions improved, but could not estimate their severity or duration. No numerical earnings or revenue guidance was provided.
- Management reduced discretionary spending, limited hiring and contracted services, and restricted travel. It said remote work had not materially disrupted operations or internal controls as of the filing. The EFX2020 cloud, data, and security transformation continued; significant related expenses and capital expenditures were expected in 2020, at levels similar to 2019.
- On April 10, 2020, after quarter-end, Equifax amended its revolving credit facility to temporarily raise the maximum leverage covenant to 4.5x for quarters ending June 2020 through September 2021, then 4.0x for December 2021, before returning to 3.5x in March 2022. The amendment also permits certain cash netting and cybersecurity-cost add-backs.
- 2017 cybersecurity incident: Equifax had accrued $800.9 million in 2019 for related losses, net of insurance recoveries, excluding legal and professional services expenses. It said additional losses could exceed accruals, but could not estimate the excess. Through March 31, 2020, it had paid $391.2 million in related settlements. A further $355.3 million consumer-fund payment was expected after final resolution of appeals, potentially in 2020 or 2021; the consumer settlement also provides for up to an additional $125 million if specified consumer costs exhaust the fund. Appeals of approval of the U.S. consumer settlement remained pending.
- Other cybersecurity-related matters remained unresolved, including Canadian and individual consumer claims, government investigations, and proposed financial-institution settlements. Several settlements remained subject to court approval. Management warned that adverse outcomes could materially affect future financial condition, results, or cash flows.
- Q1 2020 included approximately $7 million of valuation allowances against deferred tax assets at certain international subsidiaries, reflecting COVID-related economic concerns. The effective tax rate was 23.9%, compared with a 13.7% tax benefit in Q1 2019.
Investor verification priorities
- Track COVID-19’s effect on customer demand, especially non-mortgage activity and international revenue, and compare subsequent results with management’s qualitative outlook.
- Verify timing and amount of cybersecurity settlement payments, appeals, remaining proceedings, insurance recoveries, and any changes to accrued liabilities or potential exposures.
- Monitor operating cash conversion, receivables and working-capital movements, capital spending, and use of revolving or receivables borrowing to fund obligations.
- Review leverage and covenant headroom under the April 2020 amendment, debt-rating changes, and refinancing needs.
- Separate recurring operating performance from the prior-year legal accrual and Q1 2020 India-investment fair-value gain when assessing earnings trends.