Equifax Inc. — Q3 2016 Form 10-Q
Business context and reporting period. This unaudited quarterly report covers the three and nine months ended September 30, 2016. Equifax provides credit and other information services, employment and income verification, workforce services, and consumer products. Results include Veda, acquired on February 24, 2016; the company also acquired Barnett & Associates and Computersoft in August. The report presents four segments: U.S. Information Solutions (USIS), International, Workforce Solutions, and Global Consumer Solutions.
Financial performance
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Revenue | $804.1 million | $667.4 million | $2,343.8 million | $1,997.3 million |
| Operating income | $212.1 million | $174.3 million | $614.0 million | $517.0 million |
| Operating margin | 26.4% | 26.1% | 26.2% | 25.9% |
| Net income attributable to Equifax | $132.8 million | $117.9 million | $365.8 million | $317.2 million |
| Diluted EPS | $1.09 | $0.98 | $3.02 | $2.62 |
- Revenue grew 20% in Q3 and 17% for the first nine months. Management cited broad-based organic growth and Veda; currency reduced reported revenue by $19.3 million in Q3 and $55.3 million year to date.
- Q3 operating income increased 22%; year-to-date operating income increased 19%. Company operating margin expanded 0.3 percentage points in both comparisons. Higher USIS and Workforce Solutions margins were partly offset by Veda-related amortization.
- Interest expense rose to $24.3 million in Q3 and $68.0 million year to date, primarily reflecting higher debt used to finance Veda. Q3 other income was $2.4 million versus $14.4 million a year earlier; the prior-year period included an acquisition escrow settlement. 2016 year-to-date other expense included foreign-exchange losses related to Veda.
- Cash provided by operating activities was $524.5 million for the first nine months, versus $536.8 million; management attributed the decline mainly to working-capital changes, including higher receivables. Capital expenditures were $131.0 million, up from $93.6 million.
- Cash and cash equivalents were $111.5 million at September 30, 2016. Total debt was $2,856.9 million, including $706.7 million classified as short-term debt and current maturities. The company reported $467.8 million available under its revolving credit facility and was in compliance with debt covenants.
- Assets totaled $6,806.6 million, including $4,071.5 million of goodwill and $1,406.4 million of net purchased intangible assets. Total liabilities were $4,019.2 million.
Material changes and segment results
- Veda drove much of International’s reported growth: segment revenue rose 47% in Q3 and 39% year to date. International operating margin fell to 12.3% in Q3 from 19.6%, and to 13.4% year to date from 19.7%, reflecting acquired-intangible amortization and integration costs. Local-currency organic revenue growth, excluding Veda, was 10% in Q3 and 12% year to date.
- USIS revenue increased 9% in Q3 and 5% year to date; its operating margin rose to 44.0% and 43.1%, respectively.
- Workforce Solutions revenue increased 23% in Q3 and 22% year to date; margin rose to 40.8% and 42.9%, respectively, on strong growth.
- Global Consumer Solutions revenue increased 12% in Q3 and 16% year to date, while margin declined to 27.6% and 26.6%, respectively, due to product mix and partner implementation costs.
- Goodwill increased substantially with acquisitions. The annual impairment review found reporting-unit fair values above carrying values; no goodwill impairment was recorded. Purchase-price allocations for Veda and the smaller acquisitions remained preliminary.
Outlook, commentary, and risks
- Management expected modest U.S. economic and consumer-credit growth for the remainder of 2016 and full-year mortgage origination activity to be up double digits. It described international conditions as challenging and anticipated foreign exchange pressure on U.S.-dollar revenue and profit.
- Long-term expectations were organic revenue growth of 6%–8%, plus 1%–2% from strategic acquisitions, with EPS expected to grow somewhat faster than revenue. These are long-term expectations, not specific quarterly guidance.
- Management said operating cash generation and credit facilities should be sufficient for anticipated needs for the foreseeable future. It had issued $775 million of senior notes in May to refinance acquisition-related borrowings. Variable-rate debt represented 33% of debt at quarter-end.
- The CFPB had authorized its Office of Enforcement to pursue a public action concerning consumer-report and credit-product practices; Equifax was discussing a possible settlement and could not predict the outcome. A separate CFPB investigation concerning Workforce Solutions was ongoing. The company also disclosed continuing California bankruptcy litigation and other ordinary-course legal matters; recorded legal accruals were not material.
- Other items to monitor include Veda integration and foreign-exchange exposure, acquisition-related amortization and provisional purchase accounting, debt and refinancing needs, and contractual termination fees under certain outsourcing agreements. Management reported no material change in previously disclosed risk factors and concluded disclosure controls were effective.
Most important facts for investors to verify
- How much of continuing revenue and profit growth is organic, and how Veda performs after integration and currency effects.
- Whether International margins recover as integration costs subside, and whether the acquisition’s preliminary intangible-asset and goodwill valuations change.
- Debt maturity and liquidity details, including short-term borrowings, revolver availability, covenant compliance, and sensitivity to rates or credit-rating changes.
- Developments in both CFPB matters and the California litigation, including any settlement, enforcement action, penalties, or required operational changes.
- Cash conversion and investment needs, given lower year-to-date operating cash flow and higher capital expenditures.