Equifax Inc. — Q3 2015 Form 10-Q
Business context and period. Equifax provides consumer and commercial information, verification, workforce, and consumer credit-monitoring services. This unaudited filing covers the quarter and nine months ended September 30, 2015; comparisons are with the corresponding 2014 periods.
Financial performance
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Revenue | $667.4 million | $613.4 million | $1,997.3 million | $1,811.8 million |
| Operating income | $174.3 million | $153.7 million | $517.0 million | $473.0 million |
| Operating margin | 26.1% | 25.1% | 25.9% | 26.1% |
| Net income attributable to Equifax | $117.9 million | $92.7 million | $317.2 million | $269.4 million |
| Diluted EPS | $0.98 | $0.75 | $2.62 | $2.17 |
| Cash from operating activities | $247.2 million | $188.8 million | $536.8 million | $413.4 million |
- Revenue grew 9% in Q3 and 10% year to date. Foreign exchange reduced revenue by approximately $21.5 million in Q3 and $57.5 million year to date.
- Q3 growth was led by U.S. Information Solutions (USIS, +12%) and Workforce Solutions (+13%). International revenue was nearly flat as reported, despite local-currency growth; Personal Solutions grew 5%.
- Year-to-date segment revenue growth was strongest in Workforce Solutions (+20%) and USIS (+13%). International revenue declined 1% and Personal Solutions increased 5%.
- Nine-month operating margin eased 0.2 percentage points, primarily reflecting a $20.7 million restructuring charge and higher people costs. Q3 margin improved 1.0 percentage point.
- Q3 other income was $14.4 million, including proceeds from an acquisition-related escrow settlement. Year-to-date other income was nil: the $14.8 million Brazil investment impairment offset the escrow-related benefit.
Cash, debt, and liquidity
- Nine-month capital expenditures were $93.6 million, up from $63.9 million. Investing activities used $95.2 million, versus $399.5 million in 2014, when acquisitions were substantially higher.
- Financing activities used $451.0 million, including $196.3 million of share repurchases and $103.4 million of dividends. Cash declined $19.8 million to $108.5 million.
- Total debt was $1.334 billion at September 30, including $185.0 million of commercial paper; reported long-term debt was $1.146 billion. Debt was down from $1.528 billion at year-end 2014. Cash and total debt imply net debt of about $1.226 billion.
- The company reported $563.5 million available under its revolving credit facility, a 1.43 leverage ratio against a maximum covenant of 3.5, and compliance with debt covenants. Management said operating cash flow and available facilities should meet foreseeable requirements.
- Current assets of $582.1 million were below current liabilities of $690.7 million. The filing notes that $33.9 million of other current assets and an offsetting liability are restricted customer funds.
Outlook, commentary, and risks
- Management expected modest U.S. economic and consumer-credit growth for the rest of 2015, but anticipated mortgage originations would decline further in Q4. International markets remained challenging, and weaker currencies were expected to weigh on reported revenue and profit.
- Long-term targets were 6%–8% average organic revenue growth, with a further 1%–2% from strategic acquisitions, and EPS growth somewhat faster than revenue. These are long-term expectations, not specific Q4 guidance.
- The $20.7 million first-quarter restructuring charge related mainly to approximately 300 position reductions and integration and real-estate costs; most related payments were expected to be completed in 2015.
- The company recorded a $14.8 million impairment on its 15% investment in Brazil’s Boa Vista Servicos, citing revised projections and weakness in Brazilian consumer and small-business credit markets. Annual goodwill and indefinite-lived intangible tests found no impairment.
- New York and 31 states reached settlements with the credit bureaus requiring implementation of a National Consumer Assistance Plan over 6–39 months. Mississippi’s investigation and a CFPB investigation remained unresolved; Equifax said it could not predict their outcomes. Bankruptcy-related litigation and other legal matters also remained pending. Recorded legal accruals were not material in aggregate.
- Management reported no material change to the risk factors in its 2014 Form 10-K and concluded disclosure controls were effective.
Important facts for investors to verify
- Whether U.S. mortgage activity and international currency pressures develop as management expected, and their effect on reported growth.
- How much of recent growth—particularly verification and USIS growth—persists, and whether segment margin trends continue.
- Progress and costs associated with the restructuring and National Consumer Assistance Plan, and outcomes of the Mississippi and CFPB investigations and pending litigation.
- Cash generation relative to elevated capital spending, dividends, share repurchases, and debt obligations; confirm current facility availability and covenant headroom.
- Assumptions supporting the Brazil investment valuation and the conclusion that goodwill and other indefinite-lived assets are not impaired.