Equifax Inc. — FY 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019. The filing also reports unaudited fourth-quarter results. Equifax is a global data, analytics and technology company operating through U.S. Information Solutions, Workforce Solutions, International and Global Consumer Solutions.
Financial performance and liquidity
| Metric | FY 2019 | FY 2018 |
|---|---|---|
| Revenue | $3,507.6 million | $3,412.1 million |
| Operating income (loss) | $(335.4) million | $448.0 million |
| Operating margin | (9.6)% | 13.1% |
| Net income (loss) attributable to Equifax | $(398.8) million | $299.8 million |
| Diluted EPS | $(3.27) | $2.47 |
| Cash from operating activities | $313.8 million | $672.2 million |
| Capital expenditures, cash basis | $399.6 million | $321.9 million |
| Cash and cash equivalents at year-end | $401.3 million | $223.6 million |
| Net debt at year-end | $3,382.6 million | $2,635.5 million |
The 2019 income statement includes a $40.2 million income tax benefit. Debt was predominantly fixed-rate (91%); the weighted-average cost of debt was 3.8%. Equifax reported $1.10 billion available under its revolving credit facility and $221.7 million available under its receivables facility. The company was in compliance with debt covenants at year-end. Its S&P and Moody’s long-term ratings were BBB and Baa1, respectively, both with negative outlooks.
Fourth-quarter 2019 revenue was $905.8 million, operating income was $47.0 million, net income attributable to Equifax was $9.2 million, and diluted EPS was $0.07. In fourth-quarter 2018, those figures were $835.3 million, $46.1 million, $25.6 million and $0.21, respectively.
Material changes versus prior periods
- FY 2019 revenue grew 3%. Workforce Solutions rose 15% to $949.7 million, led by Verification Services; USIS rose 2% to $1,277.4 million. International revenue fell 5% to $920.6 million as currency translation reduced revenue, while Global Consumer Solutions fell 3% to $359.9 million.
- Net losses associated with legal proceedings and government investigations stemming from the 2017 cybersecurity incident were $800.9 million in 2019, net of insurance recoveries and excluding legal and professional services expenses. This was the primary cause of the swing to an operating loss.
- Technology and data-security investment continued: reported cybersecurity-related costs were $337.3 million in 2019, versus $326.2 million in 2018. Capital expenditures increased to $399.6 million from $321.9 million.
- Operating cash flow declined by $358.4 million to $313.8 million, reflecting payments related to the incident and $110.0 million of insurance proceeds received in 2018. Net debt increased by $747.1 million.
- Workforce Solutions’ operating margin improved to 41.0% from 40.2%; USIS declined to 33.1% from 35.4%, International to 10.4% from 11.2%, and Global Consumer Solutions to 13.4% from 18.4%.
Outlook, commentary and risks
- Management expected 2020 U.S. GDP activity to be below 2019, modest growth in non-mortgage consumer credit, and approximately flat U.S. mortgage inquiries for the year. It anticipated softer activity in Canada, Europe and parts of Latin America, with growth in Australia. These are qualitative expectations; the filing provides no clear numerical 2020 revenue or EPS guidance.
- Equifax expected 2020 technology-transformation and security expenses and capital expenditures to remain at levels similar to 2019. It expected legal and professional services expenses related to the incident to be significantly lower in 2020, while noting they would continue until matters are resolved.
- The 2017 breach settlement provided for a $380.5 million consumer restitution fund and up to an additional $125.0 million if specified consumer costs exhaust the fund. Equifax reported $341.5 million of related payments in 2019 and expected a further $355.3 million consumer-fund payment after final adjudication or dismissal of appeals. The consumer class settlement had final court approval, but appeals remained pending.
- Additional breach-related claims and investigations remained unresolved. The company said losses beyond accrued amounts were reasonably possible but could not be estimated; additional payments could be material. The settlement also requires consumer-assistance and information-security commitments, including third-party assessments.
- Key risks include future cyber incidents, execution and service disruption during cloud migration, reliance on third-party providers and data contributors, privacy regulation, foreign-exchange movements, economic and credit-market weakness, and competition. The filing notes that the $125 million cybersecurity insurance policy had been exhausted and had not covered losses incurred to date.
- Auditors issued unqualified opinions on the financial statements and internal controls; management and the auditor concluded internal control over financial reporting was effective as of December 31, 2019.
Most important facts for investors to verify
- Whether appeals or other proceedings change the consumer settlement, the timing of the expected $355.3 million payment, or the total remaining breach-related exposure.
- How actual 2020 legal, security and technology-transformation spending compares with management’s expectations, and whether the anticipated reduction in legal fees occurs.
- Whether cloud migration improves operating efficiency and security without material outages, customer losses or additional costs.
- Whether Workforce Solutions’ growth can offset pressure in International and Global Consumer Solutions, including currency effects and weaker regional markets.
- Cash generation, debt levels, available borrowing capacity and covenant compliance after settlement payments and continued investment.